By Brandon Moseley
Alabama Political Reporter
If the President and the Congress can not come into agreement on fiscal policy the nation will fall off the fiscal cliff on January 1. The fiscal cliff crisis will affect almost every American and has the potential to plunge the country back into Recession. U.S. Representative Martha Roby (R) from Montgomery says that she will work through Christmas to protect her constituents from higher taxes and devastating spending cuts to America’s defenses.
Representative Roby said, “This is a critical period for negotiations in Washington. The ‘fiscal cliff’ has real-world consequences for this country and for families in Alabama’s 2nd Congressional District. I’m committed to working through the Christmas holiday if that’s what it takes to find a solution, and I encourage the House leadership to continue its ongoing dialogue with the White House and the Senate. I believe there is a way to find common ground without compromising our principles, and I am hopeful that a good agreement can be reached.”
Rep. Roby said, “The federal government’s huge annual deficits are fueled by spending that is too high, not by taxes that are too low. I believe the House leadership understands that new taxes will hurt the economy and do little to bring down the deficit. I have also personally communicated to my colleagues the importance of avoiding deep automatic cuts to the military. There are other areas of the government more deserving of further cuts, and certainly reforming entitlement spending is the key to constraining future spending. I look forward to reviewing the product of these negotiations, but I will withhold judgment until my staff and I have the opportunity to carefully review the specifics of a written legislative proposal.”
Without some sort of a compromise, in 2013, the six income tax brackets of 2012 will be replaced with five tax brackets and more Americans will pay income taxes. The new tax rates will begin at 15 percent and rise to as high as 39.6 percent. This year the tax rates began at 10 percent and rose to just 35 percent. Most Americans (not just the wealthy) will see higher taxes.
Even lower income Americans pay the employee payroll tax rate. On Jan. 1, 2013, the current 4.2 percent employee payroll tax rate will revert back to 6.2 percent. The higher tax rate contribution to social security will be borne by lower and middle class Americans. Be prepared for smaller net pay when you get your paycheck in January.
Rep. Roby said that the average American household would pay $3,500 more to the federal government in 2013 than they did in 2012.
Long term Capital Gains taxes will also increase and not just for Warren Buffet. Currently if you are in the 10% or 15% income tax brackets you pay no capital gains taxes. Starting in 2013 that will increase from 0 to 10%. Taxpayers who are in the current 25% and 35% income tax brackets currently pay 15 percent on the sale of an asset held for more than a year. In 2013 that is scheduled to increase to 20 percent. If you are planning the sale of stocks, real estate or another long term asset, there will be a tax benefit to taking that income in December as opposed to putting it off to January.
Currently, qualified dividends are treated by the current tax code as long-term capital gains and pay the appropriate capital gains rate. In 2013 they will be taxed as ordinary income. Lower income taxpayers pay nothing on qualified dividends now. In 2013 that will jump to their current income tax rate. For upper income taxpayers this will result in an increase from 15 percent to a tax rate as high as 39.6 percent.
The fiscal cliff will also affect your itemized deductions. In 2012, the itemized deduction for uninsured medical expenses paid equals the excess of qualified expenses over 7.5% of adjusted gross income (AGI). In2013, the threshold rises to 10% of AGI. Seniors (taxpayers 65 year old and older) get an exemption and they will not be subject to the 10% threshold until Jan. 1, 2017. If you will be impacted by the threshold change you should accelerate medical expenses into 2012. A surgery performed in December will likely mean a bigger tax benefit than one which is postponed until January.
In 2013, high income taxpayers’ itemized reductions will be reduced by 3 percent of the amount that their AGI exceeds an annual threshold amount. In 2012, there was no threshold amount and expenses claimed on Schedule A are not subject to any limitation regardless of income. This will also affect state returns for residents of Maryland, Connecticut, New Jersey and Virginia where a majority of residents utilize itemized deductions instead of a standard deduction.
Families will also be impacted. In 2013, the Child Tax Credit will decreases from $1,000 to $500 for each qualifying dependent child, although the cost of feeding, clothing, and educating children has not decreased.
Similarly, the Child and Dependent Care Tax Credit will be reduced in 2013 to a maximum of $2,400 (down from $3,000) for one child and $4,800 (down from $6,000) for two or more dependents. The credit remains at between 20 percent and 30 percent of those amounts, based on taxpayer income.
The American Opportunity Tax Credit, which provides families a tax credit of up to $2,500 per year for 4 years of college education, will expire on December 31, 2012. In 2013, the tax credit will be decreased to a maximum of just $1,900 per year for two years.
The marriage penalty will return with a vengeance. In 2012, the standard deduction for a married couple was twice the standard deduction of an unmarried individual filing a single return. In 2013, the standard deduction for a married couple will be decreased to 167 percent of the single filer’s deduction.
Also the President’s reelection means that the Patient Protection and Affordable Care Act (“Obamacare”) will become the law of the land and a tax provision in that legislation will impose an additional 3.8% tax on the unearned income of high income taxpayers. This will apply to interest, dividends, capital gains, royalties and rents. This change will result in a maximum long-term capital gains tax rate of 23.8 percent and a 43.4 percent tax rate on dividends.
Also be prepared to be hit with higher estate taxes. The Federal Estate Tax Exemption will drop to just $1 million (down from $5.12 million in 2012) and will be taxed at 55 percent (up from 35 percent now). For example, under current law if you owned a farm or business worth $6 million and died today you would exempt the first $5.12 million and your loved ones would pay taxes on the remaining $880,000, thus would owe the federal government $308,000. The owner of the same farm or business who died in 2013 would owe much more.
After exempting the first $million, the rest of the estate would be taxed at 55%. In this example, the family would owe the IRS $2,750,000 and would likely have to liquidate that family farm or business to pay the tax burden. That tax rate will also applies to gift taxes, so be prepared to schedule time with your estate planner.
Meanwhile the interest rates on student loans are about to increase because the Congressional extension of the 3.4 percent fixed rate on the subsidized Stafford loan will expire. If not extended, it will revert back to 6.8 percent.
Sequestration cuts will also lead to the loss of hundreds of thousands of jobs many of them in the military and the defense sector.
Rep. Roby said, “Everybody likes to be home for the holidays, but I’m ready to work through Christmas to avert the “fiscal cliff” if that’s what is necessary. This is a critical time in Washington for negotiations that will have real-world consequences for this country and for families in Alabama.”
Congresswoman Martha Roby represents Alabama’s Second Congressional District.