What the fiscal cliff would mean and how it would impact us was a question on the minds of many as the debate ensured. With a deal reached and the fiscal cliff averted, we can now seek to better understand what lies ahead.
The deal preserved Bush-era tax cuts for many Americans, raised taxes on "wealthier" individuals, and delayed automatic spending cuts that were set to take place on Jan. 1.
It also provided assurances to an estimated 30 million Americans who, for the last 12 years, have had uncertainty about their taxes given the annual drama of whether Congress would extend the alternative minimum tax (which keeps tax rates from rapidly rising). This was resolved by adjusting the alternative minimum tax thresholds annually for inflation to eliminate the need for Congress to extend them, which often happened at the last minute or even retroactively.
However, the deal will impact the average taxpayer because the temporary break on Social Security payroll taxes was allowed to expire. The 2 percent cut that wage earners have benefitted from over the last two years is gone, returning the tax to the normal rate of 6.2 percent. Therefore, many will see more taken from their paychecks, with an estimated 77 percent of American households facing higher federal taxes in 2013. This is expected to generate approximately $1.6 trillion in revenue for the federal government, with the brunt primarily borne by middle-class families. The Tax Policy Center estimates that the impact on the average taxpayer to be an extra $740 a year.
Wage earners of more than $400,000 a year as single taxpayers or more than $450,000 as joint filers will see significant increases. According to the Tax Policy Center, three-quarters of taxpayers who make between $500,000 and $1 million will pay an average $10,000 more in 2013. Roughly 98 percent of those earning $1 million or more will owe, on average, $125,000 more. The deal also restored caps on itemized deductions and phases out the personal exemptions for those making more than $250,000 as individuals or $300,000 for couples. Further, it affixes a new 3.8 percent tax to investment income for individuals making more than $200,000 and couples making more than $250,000.
While estate taxes are going up to 40 percent, a 5 percent hike from 2012, the deal provided for a higher exemption level of the first $5 million of an individual's estate ($10 million for family estates), which is the same as it was in 2012. This is considerably better than the devastating fiscal cliff provision to lower the exemption to $1 million and raise the tax to 55 percent.
Conversions of 401(k), 403(b) and similar retirement plans to Roth IRAs has been made easier to encourage taxpayers to roll over their taxable retirement funds into nontaxable Roth IRAs. The gives the federal government a revenue boost now, as rollovers are a taxable event and may benefit you later depending on whether or not you will be in a higher tax bracket when you take the money out.
Child, earned-income and college-tuition tax credits in President Barack Obama's 2009 stimulus package set to expire this year were protected, maintaining them for another five years.
Aid beyond state unemployment benefits of 26 weeks was set to expire Jan. 1, but it will continue for another year, keeping unemployment insurance benefits for the long-term unemployed. In some states, aid is provided up to 99 weeks.
We hope this article will help people better understand how the fiscal cliff deal will impact their lives. Next week we will examine the deal's impact on small businesses.
* Pamela Tumpap is president of the Maui Chamber of Commerce.