Because of the inability of the two political parties to work together in Washington, President Obama signed into law the Budget Control Act in 2011 in order to raise the nation’s debt ceiling. That law calls for an automatic cut of about a trillion dollars from the federal budget across the board over ten years. This automatic cut, commonly known as “sequestration”, was never intended to take effect. But since Washington is still in a gridlock, we are now faced with this fiscal cliff.
What the fiscal cliff will do on top of the spending cuts is to potentially raise taxes by more than $500 billion in 2013 – an average of almost $3,500 per household. Much of it will come from the expiration of the so called “Bush tax cuts”.
Here is a partial list of the tax increases, not in any particular order:
What the fiscal cliff will do on top of the spending cuts is to potentially raise taxes by more than $500 billion in 2013 – an average of almost $3,500 per household. Much of it will come from the expiration of the so called “Bush tax cuts”.
Here is a partial list of the tax increases, not in any particular order:
- The maximum capital gains will generally go up from 15% to 20%
- Tax rate for qualified dividends will increase from 15% to the taxpayer’s highest marginal tax bracket
- The lowest tax bracket will rise from 10% to 15%
- The highest tax bracket will go from 35% to 39.6%
- Employees’ portion of social security tax rate will go up from 4.2% to 6.2%
- Teachers will lose their $250 deduction for non-reimbursed classroom supplies
- Higher education tuition will no longer be deductible against gross income
- The American Opportunity tax credit for higher education will expire and the Hope tax credit will return
- Maximum annual contribution to a child’s education IRA will decrease from $2,000 to $500
- Child tax credit will drop to $500 from the current $1,000 per qualified child
- Maximum dependent care expenses allowed will decrease from $3,000 to $2,400 per child for up to two children
- Marriage penalties will be re-introduced for lower tax brackets
- Phase out of itemized deductions and personal exemptions will return
- Exemption for alternative minimum tax (AMT) will drop dramatically, from $74,450 in 2011 to $45,000 in 2012 for married couples and from $48,450 in 2011 to $33,750 in 2012 for singles
- Taxpayers age 70½ or older can no longer give money directly to charities from their IRAs and deduct the donation against gross income on page 1 of Form 1040
- §179 deduction for businesses will drop from $500,000 to $139,000
- Bonus depreciation will decrease from 100% to 50%
- Certain incentives for employees to take public transit will expire
- Homeowners with cancelled mortgage debt will face higher hurdles to exclude the forgiven amount from income
- Mortgage insurance premium will no longer be tax deductible
- No more deduction for sales tax in lieu of state income tax
- Lifetime exemption will drop from $5,120,000 to $1,000,000
