Taxmageddon, taxpocalypse, the fiscal cliff, the largest tax increase in the history of the universe. That’s how the coming tax increases have been described. And they aren’t inaccurate descriptors. Everyone’s taxes are going up and that includes you. Yes, you.
“But wait,” you say, “We’re a two income MFJ family with two kids making $75,000/year. We’re as ordinary as it gets. Surely our taxes aren’t going up.” They are. Only the 15% bracket is staying the same, all of the other brackets are going up. In addition, every wage earner gets an automatic 2% increase in taxes when the FICA/SECA tax break ends on 12/31/12. That’s everyone who gets a W-2 and every self-employed person. And the marriage tax penalty is coming back. And AMT hasn’t been patched. And there is an additional .9% Medicare tax on certain taxpayers. And the list goes on.
“But wait,” you say, “I’m a single mother of three earning $25,000/year. I don’t pay income taxes so mine can’t go up.” Wrong. As mentioned above you will be making two percent less on 1/1/13. And you are actually going to be hit the hardest of any taxpayers (proportionately) because the refundable child tax credit is getting cut in half from $1000/child to $500/child. And the dependent care credit is getting trimmed back. And the earned income credit will be harder to qualify for. And the “educator expense” deduction is gone. And the residential energy property credit is gone.
“But wait,” you say, “I don’t earn wages. All of my income is from interest, dividends and capital gains. I’ve positioned myself to avoid this very thing.” All of the long-term capital gains rates are going up. Qualified dividends will now be treated as ordinary income meaning that they will be taxed at higher rates. And there is an additional Medicare tax of 3.8% on some investment income. And personal exemptions will be limited. Itemized deductions will be subject to the Pease “haircut”. And the college expense credits will get smaller.
You see, the Bush tax cuts were truly tax cuts for everyone. They have been characterized as tax cuts for millionaires and billionaires, but it’s the lowest earners who will feel the hit the hardest when they expire. The single parent in the example above was used to paying no income taxes AND receiving a check for $3000 every year. No longer. That amount gets cut to $1500 and she’ll take home 2% less. That’s an 8% effective increase on an already very tight budget.
The good news is that no member of Congress wants to be responsible for letting this happen. Many of these provisions will be extended. But nothing will be fixed until Congress faces its spending issues and makes some difficult and unpopular changes. More on that in a later post. In the meantime, sit back and prepare for a fight like 2010.