Which specific taxes would be affected by impending "fiscal cliff"

Which specific taxes would be affected by impending "fiscal cliff"

With 2013 rapidly approaching, there has been growing talk of the impending “fiscal cliff.” This refers to the combination of the tax increases and spending cuts that are currently written into law for the start of 2013. According to the Urban Institute and the Urban-Brookings Tax Policy Center, the fiscal tax increase would amount to approximately $536 billion, or about $3,500 per household. The Congressional Budget Office forecasts that real GDP would contract by 0.9 percent in the first half of 2013 as a result of the fiscal cliff. Which specific taxes would be affected? Here is a short breakdown:

  • Under current law and in President Obama’s budget proposal, the top two federal income tax rates are set to increase to 36 percent and 39.6 percent after 2012. The top rate would increase to 39.6 percent from 35 percent and would affect all taxpayers with Adjustable Gross Income (AGI) of over $388,050. The current 33 percent rate would increase to 36 percent for all individuals with AGI between $178,650 and $388,650 and for all married joint filers with AGI between $217,450 and $388,350. Under President Obama’s proposed budget, these two tax rate increases would occur but at higher income levels for the 33 percent rate. The rate would increase from 33 percent to 36 percent for all individuals with AGI above $200,000 and for all married joint filers with AGI above $250,000. Furthermore, President Obama’s proposed budget would not increase the federal income tax rates for any income levels below these amounts. However, under current law, the Bush tax cuts are set to expire which would increase ordinary income tax rates for most taxpayers beginning in 2013.
  • Capital gains tax hike. The Tax Relief, Unemployment, Insurance Reauthorization and Jobs Creation Act of 2010 extended the 2001 and 2003 tax cuts until the end of 2012. Beginning on January 1, 2013, the long-term capital gains rate will return to its prior level of 20 percent. On top of that a 3.8 percent tax on certain investment income – which includes capital gains – will be imposed as part of the healthcare care law passed in 2010. This tax will only apply to individuals with incomes over $200,000 and married filers with incomes over $250,000.
  • High stakes for dividends. Currently, qualified dividends are taxed at the same rate as long-term capital gains (15 percent). However, unless a new law is passed, dividends will be taxed at the same rate as ordinary income. Furthermore, the 3.8 percent Medicare tax also applies to dividends. Consequently, the dividend tax rate for high earners could be as high as 43.4 percent. Some companies are even pondering the thought of paying out special one-time distributions in the 4th quarter of 2012 in order to take advantage of the current tax rate for dividends.



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