What Happens to Your Taxes If We Go Over the Fiscal Cliff?
one of our Niagara photos
I listed to Marketplace every day and have hear many pieces on the fiscal cliff aka taxmageddon. Basically, there are a bunch of federal tax cuts and spending increases that are set to expire at the end of 2012 if Congress doesn’t take any action. Since the legislature is apparently completely paralyzed during our ever-lengthening election season, we won’t know if the fiscal cliff will be partially or completely prevented probably until the lame duck session starts or even the end of December.
I’ll refrain from commenting on whether or not I want these provisions to expire, but let’s just move ahead and say that some or all of them do. How will your household be affected?
The website of one of my favorite podcasts, Planet Money, summarized the key points of possible change in the fiscal cliff. You can see all of them at their website, but I decided to pull out a couple that I thought might affect people similar to us and to determine what will happen to our tax liability if the changes go through.
Bush Tax Cuts: The reversal of the Bush tax cuts means that just about every tax bracket will be bumped up to a higher percentage, for instance the 25% bracket will go up to 28%. We are in the 15% tax bracket so our top tax rate will not change, but since the 10% bracket will be lumped back in with the 15%, we will pay 15% on the portion of our income that we paid 10% on before. Looking at at this year’s tax tables, I see that amounts to about an extra $870.
Payroll Taxes: Payroll taxes are set to rise from 4.2% back to 6.2% and if they do our monthly take-home pay will be reduced by about $90.
Healthcare Taxes: The Planet Money piece states that this “will mainly affect households with income over $250,000 a year,” so they shouldn’t affect us.
Dividend income will be taxed as ordinary income: We had a small amount of dividend income last year but if I remember correctly it was taxed at 15% (the max at the time) because it was all short-term. For next year we will be taxed 15% on short- and long-term because that’s our ordinary tax rate so I’ll call that a wash.
Marriage Penalty: Once the marriage penalty is reinstated, the standard deduction for married filers will no longer be double what it is for single filers but somewhat less. I don’t think the standard deductions for 2013 have been released yet as I couldn’t find them, but I did find a source that estimates the penalty for two people exactly in our situation ($50k, no kids) to be $435.
Spending Cuts: None of the spending cuts mentioned by the Planet Money piece are likely to affect us as we are employed and not on Medicare – unless the next budget cuts back NIH funding even further, which would endanger our livelihood.
So if these fiscal cliff changes actually go through, we will see our take-home pay reduced by about $200/month – an effective 5% pay decrease!
I didn’t intend this post to be an exhaustive study of the possible fiscal cliff changes, nor am I trying to predict what will happen in Washington. I just wanted to start considering the possibility of reduced take-home pay so that I can figure out how our budget will accommodate it in advance of it actually happening!
Which parts of the fiscal cliff do you think are likely to go through? Have you thought about what your increased tax burden may be? What would you do if you suddenly had 95% of the take-home pay you did the previous month?
Filed under: taxes · Tags: budgeting, fiscal cliff, taxmageddon
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I normally don’t wade into politics…and my statement isn’t so much a political one as a frustration with Washington in general: I think they’ll all go through and we won’t experience ANY of these tax increases. It appears to me that politicians are more interested in being reelected than in finding a way out of our financial nightmares.
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I agree that some of the tax breaks will be extended, exactly for the reason you said. But I think the payroll tax has a chance of returning to 6.2%. In any case, I’d rather hope for the “best” and plan for the “worst” in terms of increased taxes (not necessarily what’s best for the country).
“Healthcare Taxes: We don’t pay premiums for our health insurance so I’m not too worried about this changing for us, plus the Planet Money piece states that this “will mainly affect households with income over $250,000 a year.””
Emily, these are extra Medicare taxes imposed on “high-income households” and have nothing to do with your health insurance premiums. If Obama is re-elected (i.e. Obamacare sticks around), they’re anticipating that health insurance premiums will go up.
I’m expecting much more in bonus income next year, which should more than compensate for an increase in the Social Security tax from 4.2% to 6.2%. The marriage penalty going away would be a huge pain if I was married, but (thankfully?) I’m not.
Technically since December’s paycheck will have no Social Security tax for me and not a full 401(k) contribution since I’ll have maxed them out, January’s paycheck will be lower no matter what, by far more than 5%. Plus, the 401(k) max is going up in 2013 according to The Finance Buff and that means a little less take-home pay each paycheck as well.
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Thanks for the clarification – I guess I conflated the two issues. I’ve fixed that sentence in the post.
Do you get your bonus income monthly or once per year? Sounds like your income will balance out anyway, which is convenient, and you’ll just have a take-home pay spike in December. Why don’t you have SS tax in December?
My bonuses are spread out throughout the year, but not monthly. You stop paying SS tax once your gross income exceeds (for 2012) $110,000, so I’ll get a take-home pay increase starting in October. And any bonuses after you hit the max don’t see SS tax taken out either.
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I personally think the marriage penalty will be dealt with. They do that every year. We usually take itemized but from this year I am planning to do standard deduction one year and club our two year charitable contribution and take the itemized the next year (we don’t have a house yet so that is pretty much it).
Two things that will affect us most is the payroll taxes and dividend income. I have been slowly building a dividend portfolio and it would suck to give a big chunk of it as taxes.
I don’t know much about the healthcare premium. The one my husband’s employer provides is really bad so we have our own. We already pay $1200 per month (due to my pre-existing conditions). I sincerely hope it doesn’t go up, otherwise we either have to take some major risks on health insurance or pretty much give up our meager savings to have insurance.
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I hope the marriage penalty isn’t reinstated. I don’t understand why it exists anyway. 🙂
Will some of the other Obamacare/ACA changes that haven’t been implemented yet help out with your health insurance premiums?
Our first paycheck at L’s new job won’t arrive until October, so I don’t think we will have enough time to get used to his check before the payroll tax changes.
I don’t know if there has been any talk about it, but if something big were to happen with the lifelong learning credit that would affect my return the most.
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I haven’t heard anything about the LLC but I also haven’t delved into the details of the set changes. Are you using it for tuition credit or some kind of fees?
I hadn’t thought about it but I guess the impact on us would be similar to wage it would be for you.
A don’t have any investments outside of our retirement accounts, so we wouldn’t be affected by changes to capital gains even if we were I’m a higher tax bracket.
Having a lower take-home paychecks would probably result in my wife lowering her retirement contribution, which is something I’d rather avoid if possible.
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We do have a tiny bit of capital gains but since we’re in the 15% bracket and it’s such a small component of our overall picture the changes wouldn’t affect us much. We would need some major budgetary changes too if everything went through, but I think we could avoid reducing retirement contributions.
I ran some approximate numbers through the calculator found on this page to see how much more I’ll be paying next year if nothing is done, and I’ll end up paying about $300/month or $3600 more for the year if they don’t pass an extension. I’m not looking forward to that.
You can calculate your own here: http://interactive.taxfoundation.org/taxcalc/#calculator
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Thanks for the link!
My friend will have to sell or abandon a vacation home he worked for 40 years to be able to buy. His taxes will be going up by 44,000 dollars a year. He says President Obama is a discriminator, takes no responsibility for his having done nothing about spending in his first term, and will return to the nothing he is in a short 4 years. He practices tyranny over the minority. Thomas Jefferson warned the founders about such a possibility and urged them to avoid it at all costs. Obama is a President of the people, by the people, and for only the number of people he can raise to feeling envy over the productive wealthy. My friend says there will be no America left within a decade, and President Obama’s legacy will be that his blithe descriminations destroyed us all, for, especially in America, what goes around, comes around, and does so swiftly.
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