The United States Fiscal Cliff: What does it all mean?

Hi everybody. Today I want to talk about tax policy and how the potential tax changes come January 1, 2013 affects taxpayers in the United States.

When the United States Congress goes back into session, one of the hot topics will be the "fiscal cliff". The "fiscal cliff" is a set of income tax credits and tax rates that are set to expire on January 1, 2013; effectively raising the income tax liability for each taxpayer. This blog entry will show how much of a tax increase to expect if no action is taken.

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CAUTION AND DISCLAIMER:

1. The information presented today is for general purposes only and is not to be used as income tax advice. If you need advice, please work with a licensed income tax professional.

2. I am only working with federal income tax - be aware that other taxes can increase and decrease.

3. There is no guarantee of the final tax rates for 2013.

4. For today's blog, I will work with single and married filers (married filing jointly). Taxpayers that are head of households, married but filing separately, and other statuses may have different tax rates.

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Current United States Tax Law for 2012

These are the current tax laws. When Americans file their income tax early next year, they will calculate tax liability using these rates.

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2012 Tax Rates

(income range, tax rate)

Single
$0-$8,700; 10% of income
$8,700-$35,350; $870 plus 15% of income excess of $8,700
$35,350-$85,650; $4,867.50 plus 25% of income excess of $35,350
$85,650-$178,650; $17,442.50 plus 28% of income excess of $85,560
$178,650-$388,350; $43,482.50 plus 33% of income excess of $178,650
$388,350 and above; $112,683.50 plus 35% of income excess of $388,350

Standard Deduction: $5,950 (phased out as income passes a certain point)

Married Filing Jointly (filing as a couple)
$0-$17,400; 10% of income
$17,400-$70,700; $1,740 plus 15% of income excess of $17,400
$70,700-$142,700; $9,735 plus 25% of income excess of $70,700
$142,700-$217,450; $27,735 plus 28% of income excess of $142,700
$217,450-$388,350; $48,665 plus 33% of income excess of $217,450
$388,350 and above; $105,062 plus 35% of income excess of $388,350

Standard Deduction: $11,900 (phased out as income passes a certain point)

Personal Exemption: $3,800 (almost every person gets one)

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Let's take an example for a single person in the United States who earned $50,000. Every taxpayer gets a personal exemption, and assume that this person takes a standard deduction in lieu of itemized deductions. Assuming no other credits apply:

Income: 50,000 - 3,800 - 5,950 = 40,250
Tax Liability for 2012: 4,867.50 + (40,250 - 35,350) * 25% = $6,092.50

Tax Rates for 2013 if No Action is Taken

If no action is taken, the income tax rates for each bracket will rise, except for the 15% bracket. The 10% bracket disappears entirely. The amounts shown in the table are 2012 amounts to determine the tax brackets - which will most likely be adjusted for inflation. These are estimated tables only, not final.

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Tax Increase in 2013?

(income range, tax rage)

Single

$0-$35,350; 15% of income
$35,350-$85,650; $5,302.50 plus 28% of income excess of $35,350
$85,650-$178,650; $19,386.50 plus 31% of income excess of $85,650
$178,650-$388,350; $48,216.50 plus 36% of income excess of $178,650
$388,350 and above; $123,708.50 plus 39.6% of income excess of $388,350

Standard Deduction: $5,950 but will probably increase - final number not released

Married Filing Jointly

$0-$70,700; 15% of income
$70,700-$142,700; $10,605 plus 28% of income excess of $70,700
$142,700-$217,450; $30,765 plus 31% of income excess of $142,700
$217,450-$388,350; $53,937.50 plus 36% of income excess of $217,450
$388,350 and above; $115,461.50 plus 39.6% of income excess of $388,350

Standard Deduction: $9,900 - due to the "marriage penalty"

Personal Exemption: $3,800 but will most likely increase due to inflation

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Let's take the same person, who is Single and makes $50,000. Assume income level stays level for 2013 and the person takes the standard deduction. Then for 2013:

Income: $50,000 - $5,950 - $3,800 = $40,250
Estimated Tax Liability for 2013: $5,302.50 + ($40,250 - $35,350) * 28% = $6,674.50

This represents a potential increase of $582 in income taxes.

You can use these estimate these tax brackets to estimate the increase in federal income taxes in 2013 - should nothing happen and the Bush Tax Brackets, which were set back in 2001 and 2003, expire.

In addition, the potential tax laws can change in 2013:

* An increase in long term capital gain tax, from 15% to 20%. This tax is for profit made on selling stocks and other long term capital assets held for more than 1 year.
* Social security tax on wages increase from 4.2% to 6.2%. Personally, I see this happening regardless of what happens in Congress over the next two months.
* The exclusion of employer-provided education assistance of $5,250 can disappear in 2013.
* The American Opportunity Tax Credit revers to the Hope Credit. The credit would be reduced from $2,500 to $1,800 and will only be available to students in the first two years of undergraduate education instead of four.
* The Child Credit and Earned Income Tax Credit is set to take a hit for 2013.

Hopefully this will alleviate some fear, or at the very least prepare taxpayers for what could be coming.

What is Congress Discussing

There is talk about extending the Bush tax brackets for at least another year for most taxpayers. Those with the highest income tax brackets (33% and 35%) could see their income tax increase and that what is in debate. Hopefully soon, Americans will know the final income tax structure for 2013

Source:
Discussion by Godfrey Kahn S.C., 5/23/2012 - Retrieved 11/11/2012

Good day everyone. This blog is information purposes only and not to start political debate.


Eddie