As the end of 2012 looms on the approaching horizon, so does the so called “fiscal cliff.” But what does that even mean?
The “fiscal cliff” refers to a combination of spending cuts being implemented to reduce our deficit, as well as various tax cuts slated to expire at midnight on December 31st, 2012 if our congress fails to take action. And, as you may well know, the ever widening partisan politics of our legislative branch now dangles these very same tax cuts and spending cuts in each other’s face and, consequently all of us, over the highly propagandized “fiscal cliff.”
How will this affect you and me?
Among the laws set to expire and/or take effect at midnight on December 31st 2012, are the payroll tax cuts, a rollback of the “Bush tax cuts” from 2001-2003, and certain tax breaks for businesses. At the same time, the taxes related to President Obama’s health care laws will also go into effect as will spending cuts agreed upon as part of the debt ceiling deal of 2011.
Let’s take a closer look.
Payroll Tax – The expiration of last year’s temporary payroll tax cut would result in a 2% tax increase for workers moving the employee payroll tax rate of 4.2% back up to 6.2%.
Bush-era Tax Cuts – At the end of the year, the Bush-era tax cuts are also slated to expire. Unless they are extended, tax rates will revert to 2001 levels and nearly all Americans will see their tax rates go up.
Capital Gains and Dividend Taxes – The expiration of the Bush-era tax cuts will also bring changes to capital gains and dividend taxes. In 2013, the top capital gains rate for most investors is slated to go from 15% to 20 %. Taxpayers in the current 10% and 15% tax brackets, who currently don’t pay tax on long term capital gains and dividends, will pay 10% on long term gains.
The treatment of dividend income – At the moment, income from qualified dividends is treated as capital gains and taxed with a rate of 15%. In the new year, dividends income will be taxed as ordinary income, with a top rate of 39.6%. These changes in particular could result in substantial increases for high-income earners.
Estate Tax – The estate tax is also scheduled to jump from 35% to 55% in 2013, while the value of estate assets excluded from estate taxes will drop from $5.12 million to $1 million.
In general, Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties truly want to avoid running off this “fiscal cliff,” a compromise appears to be very difficult to achieve as this problem in an ongoing one that our politicians have had well over a year to address. As of this publication, it would appear that a compromise of any kind will not be reached until after the December 31 deadline.
Regardless of what happens to the tax code in 2013, it’s important to plan for your financial future. Working with a tax professional and a financial advisor can help you prepare for these changes. If you need a referral, I happen to know the two best tax professionals in the entire nation: Lawrence and Linda Chaves, my mom and dad.
Call me today to discuss your real estate goals for the new year. 310-722-5959.