Deal avoids plunge off ‘fiscal cliff’

One crisis averted, but debt ceiling issue looms again

Kockelman

Kockelman

Better late than never, Congress Wednesday finally approved a bipartisan measure preventing automatic tax increases and spending cuts bill.

While the measure is late, small-scale, and certainly no “grand bargain”, the fiscal cliff fix that Congress has hastily assembled is welcome nevertheless, according to local financial planner and Gazette columnist Todd Kockelman.

Still, the measure will have an impact on some St. Croix Valley residents in the form of increased taxes on wages, dividends and capital gains, said Kockelman of Packerland Brokerage Services.

Kockelman said persons earning $60,000 annually could see about $100 less a month in pay due to a slight increase in the withholding tax.

“That’s a big deal,” he said. “Two percent doesn’t sound like a lot, but $100 a month is a couple of tanks of gas.”

Kockelman said another affect the measure has on the average resident is the increase in taxes on dividends and capital gains. He said the bill boosts the tax rate on those items to 20 percent this year from 15 percent in 2012.

“Even if you have a checking or savings account that earns interest it is affected,” he said.

One group happy to see Congress pass a bill avoiding the fiscal cliff was Wall Street, according to Kockelman.

“The stock market took off today (Wednesday),” he said. “It was up Monday and today. It was up 100 points Monday and two to three percent today.”

However, Kockelman warned that the new Congress convening today faces another looming fiscal issue when it addresses nation’s debt ceiling several months from now.

“It sounds like they’re postponing the debt ceiling debate again,” he said. “Looking two months ahead, they’ll (Wall Street) probably take that (recent gains) right back if nothing is resolved on the debt ceiling.”

But Kockelman said the measure out of Congress was better than if nothing had been done.

“It could have been worse. The capital gains and dividends (tax) could have been much worse.”

Assuming the measure passes and quickly becomes law, what changes would occur? Here are the major details in the bill, which in the big picture would raise taxes by roughly $600 billion across the next ten years.1

The Bush-era tax cuts would be preserved for 98 percent of Americans. The cuts would only expire for individual taxpayers making more than $400,000 and households making more than $450,000. Earnings above those amounts would be taxed at 39.6 percent, a 4.6 percent increase from 2012. This new top tax rate of 39.6 percent is permanent.2

Personal exemption phase-outs and itemized deduction caps would return. Gone

since 2001, they resurface in 2013. Personal exemption phase-outs would start at

$250,000 for single filers and $300,000 for households next year, and the value of itemized deductions would be curbed at those same thresholds.2,3

Estate taxes top out at 40 percent. Additionally, the agreement adjusts the estate tax exemption to $5 million. Both of these changes will be considered permanent. The

White House had wanted a 45 percent estate tax rate with a $3.5 million exemption.2,3

The AMT would be indexed for inflation. No one will object to this permanent fix.

Almost 30 million taxpayers would be spared seeing their 2012 federal taxes rise by an average of about $3,000 thanks to this provision.1

Taxes on capital gains and dividends would increase for the rich. The good news is that top earners would not see their dividends taxed as ordinary income. Dividends and capital gains would both be taxed at 20 percent for individuals making more than $400,000 and households making more than $450,000. Wealthy investors paid a 15 percent tax on long-term capital gains and qualified dividends in 2012.2

Long-term unemployment benefits would be spared. They will be sustained through the end of 2013 if the bipartisan bill is passed.1

The payroll tax holiday would end in 2013. Social Security taxes for employees would return to the 6.2 percent level next year from the current 4.2 percent rate.1

A 27 percent cut in Medicare payments to physicians would be avoided. These threatened cuts emerge annually due to the preservation of an old budget formula (drawn up in 1997). If the AMT can be fixed, perhaps this can be fixed as well during 2013.1

The EITC, AOTC and Child Tax Credit would be extended through 2017. President

Obama has long sought to preserve the $2,500 American Opportunity Tax Credit for college expenses, the Earned Income Tax Credit and the Child Tax Credit. Passage of the agreement would make it happen.1

Bonus depreciation would be preserved for 2013. This is the tax break that permits companies to accelerate depreciation schedules for major capital investments.

(Preserving this break might also imply preservation of the current Section 179 software and equipment deduction; its limit is set to diminish in 2013.)1

Renewable energy and R&D tax credits would be sustained. Both credits would be preserved for 2013 by the fiscal cliff deal.1

What about the “sequester”? Monday afternoon, Sen. John McCain, R-Ariz., told

Reuters that the Senate was considering a two-month delay of the federal spending cuts set to kick in Wednesday. (It would arrange $24 billion in “other” spending cuts instead.) Some of the cuts slated may be put off or be altered in scope.4

The market liked what it heard Monday. The Dow Jones Industrial Average rose

166.03 points Monday, buoyed by renewed hopes that legislators would work something out. Ideally, Wall Street will maintain this optimism. Here’s hoping it is shared by foreign investors and the major credit ratings firms.5

This report includes information provided by Todd Kockelman

Citations.

1. www.npr.org/templates/story/story.php?storyId=168366341 (12/31/12)

2. www.nytimes.com/2013/01/01/us/politics/2-sides-in-talks-inch-closer-but-no-fiscal-deal-on-final-day.html (12/31/12)

3.  online.wsj.com/article/SB10001424127887323820104578213242594177744.html (12/31/12)

4. www.reuters.com/article/2012/12/31/usa-fiscal-spending-mccain-idUSL1E8NV5RK20121231 (12/31/12)

5. www.cnbc.com/id/100346272 (12/31/12)

 

up arrow