ON THE MONEY: How Far Will You Fall off the Fiscal Cliff?

  • Posted: Sunday, November 25, 2012 8:32 a.m.

It seems that we have a financial crisis in Washington at the end of every year over some important tax provision that was not properly addressed by our legislators until the proverbial gun has been placed to their collective heads. This year the stakes are much higher, since in their wisdom, Congress has pushed back the days of reckoning for several tax cuts that had been enacted or extended previously. The Bush tax cuts were passed in 2001 and 2003, and the Obama cuts were put into place in 2009, and they all will expire at the end of December. Additionally, temporary cuts of 2 percent in employee S.S. payroll taxes were implemented in 2010, and they will disappear at year end. Finally, Congress has managed to keep its record intact by not fixing the recurring escalation of the Alternative Minimum Tax threshold.

If no changes are made effective for Jan. 1, 2013, our total tax burden will go up by an estimated $536 billion in 2013, and that amount includes $24 billion in Obama care tax increases. As a consequence of Congressional inaction, 90 percent of all households would pay more taxes next year, and the average tax increase would amount to around $3500 per family.

If your AGI is $65,000, you are in the middle quartile; $108,000 puts you into the fourth quartile; and, if you are fortunate enough to earn $500,000, you are in the top quartile. The conclusions are certainly straightforward: 31 percent of taxpayers would face shouldering 77 percent of the total tax increase.

Given the amount of rhetoric that is emanating from our nation’s capital, it would appear that Congress and the president will act, and two changes that will undoubtedly be enacted are: first, to allow the payroll tax cuts to expire since they were never intended to continue; and, secondly to put into place another patch for the computation of the Alternative Minimum Tax. The betting money is that the Bush tax cuts that limited the top tax bracket to 35 percent and instituted a bottom bracket of 10 percent will be extended and that the personal exemption for estate taxes will be placed at $3.5 million and the tax bracket on the remainder of estates will be 35 percent.

Most of the conversations between Democrats and Republicans have been centered on two areas: how “best to tax the rich,” and dealing with the tax credits that were passed in 2009. The latter has a lesser tax impact, but Republicans will probably bridle over continuing the expansion of the Earned Income Tax Credit, and the refundability of the Child Tax Credit (you get money back, even if you owe 0 taxes).

Taxing the rich is a big no-no for Republicans, but one way out for them is to reduce the value of itemized deductions by capping the dollar value of these deductions at, say, $25,000 or some higher amount. If some cap is implemented, it would provide the opportunity to repeal the Alternative Minimum Tax, since a dollar cap would have the same or greater tax revenue impact. Other limitations in the value of itemized deductions, such as mortgage interest or charitable contributions, are also possible.

Limiting the dollar value of itemized deductions would minimally impact most seniors, since many of don’t have enough itemized deductions to reach the cap levels that are being bandied about.

The information in this column came from an article published by the Tax Policy Center last month.

Got a financial planning question for Greg? Email him at greg@lifesolutionsonline.net.

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.

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