While the House is still set to vote on the Senate Bill to avoid the “Fiscal Cliff”, it seems clear that all Americans with a job will pay higher taxes in 2013.
For starters, the “Payroll Tax Holiday” looks like it will expire which will cost all workers an additional 2% on their payroll taxes. The Social Security tax rate will increase from 4.2% in 2012 to 6.2% in 2013, costing a typical household earning $50,000/year an additional $1,000 in taxes and up to $2,202 for a household earning the maximum $110,100 which is subject to Social Security tax. The “Making Work Pay” tax credit (which the payroll tax holiday supposedly replaced) will not come back, however. This is a major hit to low and middle income families when considered as a percentage of total household income.
Some additional taxes going into effect in 2013 include some of the taxes included in the Affordable Care Act.
- A 2.3% tax is being applied to Medical Device makers, so those individuals who need these devices (things like artificial hips, bedpans, stents, wheelchairs and defibrillators) will see higher costs.
- The threshold for deducting Medical expenses will increase from 7.5% to 10%.
- The cap on the deduction for Flexible Spending Accounts will be reduced from $5,000 to $2,500
- A new Medicare Part A surtax on unearned income for individuals earning more than $200,000 and couples earning more than $250,000 of 3.8% begins in 2013.
- Additionally, for those earning over $200,000 ($250,000 for Married), there will be an increase of 0.9% in the Medicare tax on earned income.
As a part of the “Fiscal Cliff” deal (assuming the house passes the Senate bill) the following tax rates occur (2013 versus 2012):
- The top income tax rate for those earning $400,000 ($450,000 for Married) will go from 35% to 39.6%.
- The tax on Capital Gains and Dividends for those very high earners will increase from 15% to 20% (plus the 3.8% Medicare Part A sur-tax)
- There will be a phase out of deductions for individuals earning $200,000 ($250,000 for Married) couples. Although somewhat hidden, this is projected to increase taxes by $152 billion over 10 years.
- The estate tax increases from 35% to 40%, but there is still a $5 million exemption.
The good news on the tax side is as follows:
- Bush Tax cuts for those with incomes under $400,000 ($450,000 for Married) are extended for 5 years. However, those with incomes of $200,000 ($250,000 for Married) may pay higher taxes do to the phase out of the Personal Exemption and Itemized Deductions.
- The Alternate Minimum Tax fix was made permanent AND retro to tax year 2012. This fix is PERMANENT.
- There will also a number of tax benefits for business such as accelerated depreciation that were extended one year.
On the spending side, the Senate bill will extend the unemployment benefits another year and fix the Sustainable Growth Rate cut to the Medicare Physician’s Fee Schedule for 1 year. There were no major spending cuts included in the Senate bill.
All in all, it seems like the weight of the country’s $16.4 trillion dollar debt is just starting to be felt (even though the borrowing rate for the country’s debt is incredibly low at 1.68% for a 10 year note and a small 1% increase in borrowing costs would easily dwarf any debt reduction being proposed with higher taxes and reduced spending). Additionally, there are invisible “taxes” to the middle classes and poor which destroys their purchasing power (due to the vast inflation of the money supply due to the Fed’s Quantitative Easing programs of purchasing debt).
Amazingly, even with these new taxes, it appears that we will still run a $1+ trillion deficit, which means our country’s debt will be increasing faster than our GDP growth rate which cannot be sustained in the long run (6+% increase in debt versus a 2% or maybe 3% growth in GDP). Given an increased GDP growth rate would likely mean higher interest rates (and higher interest payments on the debt), it seems to me that meaningful spending cuts need to be on the table and MUCH higher taxes as well. . .
Oops, I forgot, Happy New Year!