Tax Cliff Winners and Losers

We didn't go over the fiscal cliff. I don't think anyone really thought we would. Right now, Congress is debating raising the debt ceiling. There are arguments on both sides, but somehow a negotiated settlement will result in our children and grandchildren owing a great deal more. It will be up to them to figure out how and if such a debt should be paid. In the short term, the tax deal that was struck contains good news and bad news in most cases depending upon your income level. Many taxpayers enjoyed what was called the “payroll tax holiday”. This resulted in a 2% reduction in the social security tax withheld. This sweet arrangement was not continued as part of the tax deal for 2013. What this means is workers receiving a paycheck will see a smaller net amount. Self-employed individuals should anticipate a higher, that is normal, self-employment tax rate and increase their estimated tax payments accordingly.

The estate and gift tax exemption for 2013 increases to $5,250,000, while the top tax rate jumps to 40%. The annual gift tax exclusion rises to $14,000 per donee. Congress has also approved the portability of the estate tax exemption between spouses.

 Now this business of the income tax rates: The Congressional Research Service, which at its website states “The CRS works exclusively for the United States Congress providing policy and legal analysis to committees and members of both the House and Senate regardless of party affiliation” found in its report called “Taxes and the Economy: An Economic Analysis of the Top Tax Rate since 1945” that the reduction in the top tax rates has had little association with saving, investment or productivity growth. The report concluded that it would be reasonable to assume that a tax rate change limited to a small group of taxpayers at the top of the income distribution would have a negligible effect on economic growth. What does this mean in English? In other words the folks euphemistically called the “rich” would not all of a sudden decide to withdraw from their pursuits if their tax brackets went up a bit. Democrats have typically advocated raising these taxes to increase revenue. Republicans on the other hand stress that reducing tax rates would increase economic growth. Tax rates in the United States are still a bargain considering the service, protections and lifestyle we enjoy. So how do the tax rates come out? The witching number is $400,000 and it appears at several places. For example, the 39.6 tax rate will now apply to taxable income for single individuals over $400,000 and 450,000 for married couples filing joint returns. The top tax rate on capital gains and dividends will rise to 20% for those same individuals. For others the 15% rate will continue to apply. So for 2013, there will be seven potential tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. All of which are simply way too low. Itemized deductions for 2013 will be reduced by 3% of the excess of adjusted gross income over $250,000 for singles and $300,000 for married taxpayers. The total reduction cannot exceed 80%. Medical expenses, investment interest, casualty losses and gambling losses, which are allowed only to the extent of winnings, are exempted from the cutback. There is a great deal more to come from our beloved Congress in the name of Tax Reform.