What Just Happened? | The Fiscal Cliff Deal and You

Over the Fiscal Cliff and back again, all during the holiday. 

Well, in case you missed it, this week saw the US go over the Fiscal Cliff and return, all during the holiday time period. This likely minimized the effect felt by individuals during that time while decisions were made about certain aspects of the Fiscal Cliff. There have certainly been lots of policy comments about the Fiscal Cliff itself and the current legislation, but we will leave it to you to decide if something is good, bad or neutral. Here we will outline some of the tax and financial impacts you may experience, since most of us are asking the very valid question—What does this mean for me?

 

What in the world is/was the Fiscal Cliff?

Many of you are happy to have survived the Fiscal Cliff and grateful that news coverage of it might stop. But, there are many who are not even certain what the Fiscal Cliff was and why we should care about it. In a nutshell, the Bush era tax cuts were set to expire on 12/31/2012, returning income tax rates to prior (and higher) levels. Concurrent with this were a number of other tax policies that would expire, including the tax treatment of dividends and capital gains as well as the thresholds for certain estate tax exemptions. Additionally, a number of programs funded by the government were set to experience automatic budget cuts. The vast number of changes slated to occur and the combined impact of these fiscal policies led to the term the Fiscal Cliff.

 

House Fiscal Cliff Vote

 

What was the resolution?

The House and Senate voted to pass the 154 page Fiscal Cliff bill. Below are highlights that may be of interest to you.

Income Tax Rates

The Bush tax cuts that were put in place temporarily were extended permanently (meaning that there is no expiration date, or ‘sunset’ clause) for everyone except individuals earning more than $400,000 or couples with income over $450,000. For those households (earning more than $400,000 or $450,000), the top rate on income moved from 35% to 39.6%.

Capital Gains and Dividends

For those same top-bracket taxpayers, the bill will raise rates on capital gains and dividends from 15% to 20%. The 15% rate would continue to apply to most other taxpayers; however, people in the lowest tax brackets (10% and 15% brackets) would continue to have a zero tax rate on capital gains and dividends.

Estate and Gift Taxes

The estate-tax and gift-tax exemption will remain at $5 million per individual. However, the top tax rate on amounts above the exemption will increase from 35% to 40%.

Payroll Taxes

For all wage earners the payroll tax cut has been allowed to expire. This will cause most wage earners to see a reduction in their take-home pay. For an individual earning the maximum range of $113,700 or more, the increased payroll taxes will be approximately $200 per month. But, it will take up to four weeks for people to really see this effect due to the time required to implement the new law.

Alternative Minimum Tax

The bill permanently (and retroactively) adjusts the alternative minimum tax calculation to prevent millions of middle-class taxpayers from being subject to AMT. This is retroactive to 2012 and will be indexed for inflation going forward.

Deductions

The bill limits certain income tax deductions for individuals earning $250,000 or couples with $300,000 of income. For these individuals, the bill would phase out the personal exemption ($3,000 per person for most). It also limits itemized deductions (up to 80%) for deductions against adjusted gross income, including mortgage interest and charitable donations.

The bill allows for the permanent extension of the adoption credit and the expanded dependent-care credit. It provides a two-year extension for the state sales-tax deduction in place of state income taxes. It also allows for a 2 year extension of the $250 deduction for teachers’ classroom expenses.

Charitable Donations of IRA Assets

There will be a two-year extension for charitable donations of IRA assets, up to $100,000 for taxpayers that are 70-1/2 and older.

Spending Cuts postponed

As part of the fiscal cliff, $110 billion in spending cuts for various government activities was to kick in automatically. These cuts were postponed for two months.

Unemployment Benefits

The bill granted a one-year extension of long-term unemployment benefits.

Other Items Included

Some other items were included in this bill, due to the year-end timing. For example, it provided an extension of the farm programs in order to stop a significant spike in milk prices. The bill also blocked a Congressional pay raise.

 

Thank goodness I don’t have to hear about this again!

Sadly, that is probably not true. In about two months, the delayed spending cuts (of about $110 billion) will again be at the forefront unless there is another bill to provide alternative options. At about the same time, we will once again face the debt ceiling as the US will need to increase its borrowing limit. So, we can probably expect another period of policy analysis, political statements and heightened coverage while we continue to seek an agreed-upon fiscal policy.

 

 

Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Janice Deringer
Janice Deringer

Financial Advisor

Janice L. Deringer is a financial advisor and consultant who focuses on serving individual and corporate clients in Portland, OR. She brings 20 years of institutional investment management experience to her strong interest in educating women and individuals regarding financial decisions, realities and possibilities.

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What Just Happened? | The Fiscal Cliff Deal and You

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