Just What is the “Fiscal Cliff?”
As we approach the end of 2012, you’ve likely heard lots of talk among politicians and the media about the impending “fiscal cliff.” This term refers to a combination of tax increases and spending cuts that are slated to take effect in January 2013 if Congress fails to take action. But how will this affect you?
Payroll Tax – 2013 will bring the expiration of the payroll tax cut enacted by Congress in 2011. Starting next year, the current employee payroll tax rate of 4.2 percent will go back to 6.2 percent.
Higher Tax Levels – At the end of the year, the Bush-era tax cuts are slated to expire. Unless these cuts are extended, tax rates will revert to 2001 levels. The current 10 percent tax bracket will be eliminated, making 15 percent the lowest tax bracket. The existing 25 percent tax bracket will increase to 28 percent, the current 28 percent tax bracket will increase to 31 percent, the 33 percent tax bracket will increase to 36 percent, and the 35 percent tax bracket will increase to 39.6 percent.
Capital Gains and Dividend Taxes – The expiration of the Bush-era tax cuts will also bring changes to capital gains and dividend taxes. In 2013, the top capital gains rate for most investors is slated to jump to 20 percent from its current rate of 15 percent. Taxpayers in the current 10 percent and 15 percent tax brackets – who do not have to pay any tax on long-term capital gains and dividends – will pay 10 percent on long-term gains. The treatment of dividend income will change as well. Currently, income from qualified dividends is treated as capital gains and taxed with a top rate of 15 percent. Next year, dividend income will instead be taxed as ordinary income, with a top rate of 39.6 as outlined above. While taxes on long-term capital gains and dividends will go up for everyone, these changes could result in substantial increases for high-income earners.
Estate Tax – The estate tax is also scheduled to jump from 35 percent to 55 percent in 2013, while the value of estate assets excluded from estate taxes will drop from $5.12 million to $1 million.
Marriage Penalty – The marriage penalty will reappear in 2013, potentially resulting in a greater tax burden for married couples filling jointly.
Other Changes – The coming year could also bring changes to itemized deductions and exemptions, the alternative minimum tax, the child tax credit, and the child and dependent care tax credit, among others. Regardless of what happens to the tax code in 2013, it’s important to plan for your financial future. Working with a tax professional and a financial advisor can help you prepare for these changes and help you stay on track as you pursue your goals.
Jana Swenson is a Vice President/Investments with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, and can be reached by calling the firm’s Murrieta, California office at (951) 461-7220 or toll-free at (866) 894-2461.