Musings of Captain Justice a/k/a Gil Jones

Fiscal cliff looming includes personal tax hikes for everyone

The fiscal cliff includes tax hikes

The “fiscal cliff” composed of many elements is much in the news. Part of that is an increase in many taxes — not only income taxes on the “rich” — which will affect everyone in one way or another. The purpose of this writing is to attempt some plain language discussion of these matters and to assemble a variety of sources from all sides of the politics involved. (update: super set of charts – very understandable)

Below you will find a collection of snippets from authoritative sources regarding the “fiscal cliff” and in particular the expiring tax cuts. click here  At the very bottom of the article you will find links to a number of other selected articles.

What comprises the fiscal cliff

One factor pushing toward the fiscal cliff is the failure of the federal government to address spending excesses leading to continued annual deficits and the exploding national debt. Everyone in Washington is to blame for the crisis, democrats and republicans alike, in Congress and the Whitehouse. Budget sequestration (an odd way of labeling it I thought) is impending which causes an automatic $55 billion in cuts to social services and $55 billion to the defense budget, thus creating an instantaneous push of those sectors over the fiscal cliff.  Many writings and commentaries are also ongoing on the possible effects of the “cliff” to cause higher unemployment, impact on the GDP, a falling stock market and recession. Those topics will not be discussed here. Then there is the matter of personal tax impact.

Personal tax component of the fiscal cliff

You, dear reader, are headed toward your own fiscal cliff by virtue of an increase in your income taxes. While there are many collateral consequences predicted that will affect most people peripherally, you are most likely headed toward direct, personal impact.

Changes to income tax brackets take place across the board:

10% bracket goes back to 15%
25% bracket to 28%
31% bracket to 33%
33% to 36%
35% to 39.5%

Source: (sec. 1(i)(2) and sec. 901 of Pub. L. No. 107-16)

That is pretty obtuse, so what does this mean to your taxes? Look at the chart below where the details are demonstrated graphically, and clearly according to how much you make.

Tax increases beyond personal income tax add to the fiscal cliff

Other tax increases that are seldom discussed occur in the nature of expiring credits and other measures outside of the personal income tax:

  • Amounts of dependent care credits reduced — affects working parents.
  • Adoption credits reduced.
  • Earned income tax credit phases out at lower incomes (reduces tax refunds for very low income earners).
  • Credit for employer-provided child care eliminated.
  • Work opportunity tax credit targeted to hiring qualified veterans eliminated.
  • Marriage tax penalty comes back.
  • Certain limitations on itemized deductions return.
  • You now get taxed on debt forgiven after your home is foreclosed.

It goes on forever just on what expires in 2012. Many provisions are slated for expiration in 2013 and beyond. If you are insanely curious, you can read the report of the Joint Committee on Taxation.

The point is simple: whether you call this fiscal and tax crisis an approaching “fiscal cliff” or something else, the problems in Washington are huge and they WILL affect YOU. Pay attention and remember:  elections have consequences.

Selected snippets on the fiscal cliff

Failure to come up with a solution could knock U.S. gross domestic product in the first quarter to a 3 percent annual rate of contraction, Fink estimated, based on the current run rate of 2 percent annual growth. That risk is already hurting the economy with CEOs reining in spending and reluctant to hire workers, he said.

via Spain, U.S. fiscal cliff may spark market correction: BlackRock’s Fink | Fox Business.

Without action by Congress to avoid a “fiscal cliff,” Americans should expect a “significant recession” and the loss of some 2 million jobs, CBO director Doug Elmendorf said in his gloomiest assessment yet.

He said the economy is already being “held back” by the mere anticipation of the fiscal cliff and the uncertainty surrounding it, causing businesses to put off investment and hiring decisions.

via U.S. CBO sees worse economic wreckage from fiscal cliff | Reuters.

If the Bush-era tax cuts are allowed to expire, the majority of Americans will see their taxes rise(emphasis added)

via For High Earners, Expiring Tax Cuts Would Hit Hard : NPR.

Via the above link.
Look carefully. (click graphic to enlarge)
The “hit” is across the board. And while the increase is touted as mainly hitting the “wealthy” you need to look where “wealthy” begins.

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