We keep hearing the phrase as the media tries to not only alert us, but scare us. But do we really know what it means, what it means to us?
The “Tax Cliff” is December 31st. The last day of the year, the day when tax laws and provisions that are in place now will expire. Laws change every day right? So why the big hub bub? Well, it’s because most of the provisions expiring are the ones that are beneficial to the middle class. Here is a list of the ones that I think will affect most of our clients:
Payroll tax reduction: The lower 4.2% rate for employee’s portion of the Social Security payroll tax will expire and revert back to 6.2%.
Estate, gift and GST tax: Currently the tax rate is 35% for these taxes and an exemption for the first $5.12 million. This tax will go back to the rates in effect in 2000. The top tax rate will be 55% and the exemption amount will be a mere $1 million. That’s right we’re going back 12 years on this one.
Marriage penalty relief: The 15% tax bracket will decrease and the standard deduction for married taxpayers will decrease.
Earned income tax credit: The starting and ending points for the credit will decrease. Which means fewer will qualify for the credit. This credit is for low income individuals typically with children, so who really loses here? That’s right, the kids.
$1,000 child tax credit: This will revert to $500. The kids lose again!
Discharge of indebtedness on a principal residence: This will no longer be excluded from gross income. That’s right, you get foreclosed on and the debt forgiven may be taxable income to you.
There are many other provisions that will expire on December 31st, I just tried to hit on the ones that I know will affect most people. Congress scrambled around in 2010 and extended most of these same provisions, will they do it again? Let’s hope so. But when will they stop passing laws at the last minute and really figure this out? When will they learn that the problem is the overspending?
The President has been clear, he wants to raise taxes. He continues to say that he wants the wealthy to pay more, but the above provisions are not affecting only the wealthy. If Congress doesn’t extend these provisions, it is a tax increase that the President didn’t even have to fight for, but one that we all have to pay for.