Financial Technology

Financial Technology

January 09, 2013

The Fiscal Cliff Deal in a Nutshell

While the federal government’s so-called “fiscal cliff” debacle may have left you angry, incredulous or just plain confused, now that the deal is done (or the argument postponed, in any case), you may be wondering what it actually means for you or your small business. The deal that was passed by Congress on January 1, 2013 and signed immediately by President Obama has a name: it’s the “American Taxpayer Relief Act of 2012” (because “Dysfunctional Congress’ Fiscal Cliff Debacle” doesn’t look so great atop a piece of federal legislation).

While the new legislation, which was necessary to address the expiration of the Bush tax cuts of 2001 and 2003 (and renewed in 2010) may have prevented the catastrophes that would have gone into effect had we reached the end of the year with no deal and makes permanent much of the Bush tax cuts except on the wealthiest Americans, U.S. workers are still going to see some extra taxes coming out of their paychecks.

Here’s how it works for most Americans: individuals with taxable income of under $400,000 per year ($450,000 for a married couple on a joint tax return) will see tax rates for income, capital gains and dividends remain at their 2012 levels, instead of reverting to the higher rates that would have occurred had we gone “off the cliff.” However, 2010’s cut to payroll taxes was not extended in the new legislation, which means that the 4.2 percent rate will rise to earlier levels of 6.2 percent. The Boston Globe noted that President Obama had requested that the lower 4.2 percent payroll rate be extended, but lawmakers declined.

Terra News’ Mark J. Kohler notes that it’s a mistake to call it a tax increase, since it was never intended to be permanent.

“If your memory has faded, it’s technically not a tax increase, but the end of a tax holiday in effect since 2010,” writes Kohler (News - Alert). “It was a nice vacation, but it’s time we quit borrowing from a broken Social Security system to stimulate the economy.”

There is grumbling about it nonetheless: paychecks grew at a weak 2.4 percent during 2012, which means the higher rate of payroll taxes will essentially wipe out any gains made by individuals. If you include inflation into this mix, it means that most Americans’ income will actually drop a total of 1.4 percent compared to this time last year, according to WonkBlog.

There have been serious questions about whether this negative gain in income will cause Americans to cut back on spending, which could, in turn, hurt an already fragile economy. Given Americans’ propensity for getting into debt (and not following up on annual vows to pay it down), it seems likely that we’ll see average household debt increase this year.

The new legislation also provides a patch for Medicare reimbursement, an extension of unemployment insurance benefits, the extension of tax provisions like the American Opportunity Credit, and delays the implementation of the scheduled automatic sequestration spending cuts by two months.

Time ran a useful article this week with tips on how the average U.S. household can absorb this payroll tax hike without causing pain: suggestions include driving less, shopping smarter (waiting until the things you want go on sale, using coupons and keeping track of supermarket specials) and bringing a packed lunch to work instead of dropping $12 a day at the deli.

In the meantime, we can look forward to the tiresome repetition of much of the fiscal cliff fiasco when Congress once again is forced to address the automatic sequestration spending cuts in the weeks to come, and will be unwelcome by a majority of Americans suffering from a bad case of “Fiscal Cliff Fatigue.”

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Edited by Rachel Ramsey

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