How the upcoming New Year could affect your taxes
“Fiscal cliff” is the popular shorthand term used to describe $1.2 trillion in tax increases and spending cuts that were set up when Congress was dealing with the debt ceiling in 2011. Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law.
If lawmakers do not reach an agreement to soften the impact of the expiring tax laws, the following additional areas could be affected:
All federal income tax rates will go up.
Currently, there are six federal income tax rates, ranging from 10 percent for lower-wage earners to as much as 35 percent for the highest-wage earners. If no action is taken and the country goes over the “fiscal cliff,” then those tax rates will go up for everybody. Under the fiscal cliff scenario, there will be five tax rates,ranging from 15 percent to 39.5 percent, according to The Washington Post.
Social Security payroll taxes will go up.
The temporary Social Security payroll tax cut that was part of the Bush-era tax cuts will expire, causing the tax rate to jump from 4.2 percent to 6.2 percent, according to the Council on Foreign Relations. That decreases your take-home pay.
The Alternative Minimum Tax will apply to more taxpayers.
The Alternative Minimum Tax is a flat tax on all income that exceeds a certain threshold. For many taxpayers who claim deductions and tax credits, the AMT establishes a higher tax they must pay instead. Under the fiscal cliff scenario, millions more taxpayers will be subject to the AMT, which will effectively raise their taxes, according to Bloomberg.
Child tax credits will be reduced.
Currently, taxpayers can claim a $1,000 credit per child. But if we go over the fiscal cliff, that credit will be reduced to $500 per child, according to the Post. The tax credit for child and dependent care will also be reduced: Parents can currently claim a percentage of up to $3,000 for one child’s expenses; under the fiscal cliff scenario that would be reduced to $2,400.
A great calculator to determine your potential tax ramifications from the “fiscal cliff” can be found here: http://www.creditcards.com/credit-card-news/fiscal_cliff-calculator-1701.php. If you are concerned about tax increases for your business or family, please contact business attorney James Buchholz at JBuchholz@tcrjlaw.com for more information.