Will We Fall Off The Fiscal Cliff in 2013 – Impacts on Your Taxes and Finances

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The Washington Post had two graphics that neatly summarize the impacts from the fiscal cliff. This is the number one topic in the world of finance and almost all Americans will be impacted by the potential fallout in some fashion. My opinion is that Congressional Republicans and the Obama administration will reach some form of deal by year-end to avert falling off the so called fiscal cliff. Because if they don’t the potential consequences from the loss of consumer and business confidence could be dire to an already fragile economy.

What is the Fiscal Cliff? It is basically a set of tax hikes and spending cuts that will go into effect if Congress and the re-elected Obama administration don’t compromise and get their act together. If we go over the “fiscal cliff” at the start of 2013, federal income tax rates will return to the higher pre-Bush tax cut era levels (see potential 2013 rates), the FICA payroll tax credit holiday disappears, federal long-term unemployment benefits go away and people who lose their jobs in 2013 will only be entitled to 26 weeks of state unemployment benefits. Medicare reimbursements to doctors will also get cut and because the debt ceiling stays the same the government will be forced into taking sequestration measures which means across-the-board government spending cuts, including a $55 billion (9%) cut to the defense budget.

The graphic below shows how the fiscal cliff tax hikes and expiring tax breaks will impact groups based on their income levels.  As expected, it will affect wealthier Americans differently (and to a larger extent) than lower-income Americans. The Bush-era tax cuts, or 2001-03 low/middle income tax cuts in the graphic, are by far the largest component of the fiscal cliff.

Fiscal Cliff components - 2013 Taxes That May ChangeThe increase in marginal tax rates in relative terms though will hit low income earners the most since America has a progressive tax system. In fact in percentage terms the lowest income earners will see a nearly 65% increase to their marginal tax rate.

Other good articles from around the web on the fiscal cliff are listed below:

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{ 2 comments… read them below or add one }

robert December 21, 2012 at 10:27 pm

what will happen is the President and Democrats will ask for taxes to be increased only for those making 250 k or more… and they will win on this for there are enough Republicans in the House to vote for this .. Tea Party Republicans will be diminished next year 13 of then either lost or retired in 2012….everything else will be negotiated.. when they return in January 2013

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Andy (Author) November 13, 2012 at 9:38 pm

According to TurboTax Vice President and CPA Bob Meighan , Here’s what people need to know about the pending tax law changes:
Alternative Minimum Tax (AMT) Patch - Today the AMT usually hits taxpayers who have a household income over $75K and are married with more than two kids. However, unless the AMT is patched by the end of the year, an estimated 26 million households will face the AMT for the first time. This threatens to add an average of $3,700 to taxpayers’ bills for the current tax year. That said, historically Congress has patched the AMT every year since 1969 without fail.
Tax Extenders – The “Tax Extenders” refer to a broad set of temporary tax laws. Here is a short list of the higher-impact deductions and credits that are included in the “Tax Extenders” package currently on the table:

- Educator Expense Deduction: This is a $250 deduction available to teachers K-12 who purchase classroom supplies. TurboTax data shows that only about 3% of our taxpayers claim the Educator Expense Deduction
- Tuition and Fees Deduction: This deduction allows some college students or parents to deduct certain expenses related to schooling, including tuition, books and other supplies. TurboTax data reveals that only about 2% of our taxpayers claim this tax deduction.
- Residential Energy Property Credit: This law increased the energy tax credit for homeowners who made certain energy efficient improvements to their existing homes. According to TurboTax data only an estimated 4% of our taxpayers claim this tax credit.

Bush-Era Tax Cuts – As the name implies, the “Bush Tax Cuts” were tax cuts first passed in 2001 under George W. Bush and then extended in December 2010 by President Obama. The deductions and credits included in the Bush Tax Cuts do not impact your 2012 taxes as they won’t come into play for another year. What you could see early next year is changes to your paycheck (starting in Jan. 2013) due to changes in 2013 tax brackets.

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