If you’ve been paying any attention to the news, you doubtless know that the United States is rapidly approaching a “fiscal cliff.”
This is the date that various tax cuts and benefits enacted over the past 11 years are set to expire. That date is Jan.1, 2013.
It’s quite possible that President Obama and Congress will come to some agreement before Jan. 1 and extend at least some of these tax cuts.
However, it seems equally possible that they won’t.
What happens as of Jan. 1 if no deal is reached and we plunge off the cliff? Your taxes are going to go up.
The following handy chart shows what will happen if the most important of these tax provisions expire.
Expiring provision Effect if not extended Increase in size of 15 percent rate bracket for married couples to double that of unmarried filers The current 15 percent rate bracket for married couples filing jointly (200 percent of the deduction for unmarried individuals) will be reduced to 167 percent of the deduction for unmarried individuals. As a result, low-income and middle-income two-earner couples will owe more to the IRS than they would if they were single making the same income. Reduced capital gain rates for individuals Capital gains will be taxed at a 20 percent rate (increased from the current 15 percent rate). Dividends of individuals taxed at capital gain rates Dividends received by individuals will be treated as ordinary income and taxed at top income tax rate rather than as a capital gain, currently 15 percent. 10 percent individual income tax rate The 10 percent income tax bracket will be removed; the lowest income tax rate bracket will then be 15 percent Tax rates in top four brackets Tax rates in the top four brackets will be increased to (from current rate): 39.6 percent (35 percent), 36 percent (33 percent), 31 percent (28 percent), 28 percent (25 percent). Increase in standard deduction for married couples The standard deduction for married couples (currently 200 percent of the deduction for singles) will be reduced to 167 percent. As a result, low-income and middle-income two-earner couples will owe more to the IRS than they would if they were single making the same income. Repeal of overall limits on itemized deductions (the “Pease Limitation” Limits on itemized deductions will be restored (currently, there is no limit on allowable deductions). The total amount of itemized deductions will be reduced by 3 percent of the amount by which a taxpayer’s adjusted gross income exceeds a certain threshold. As a result, high-income households may not be able to take some itemized deductions. Repeal of personal exemption phaseout Under present law, the amount of a taxpayer’s personal exemption is not phased out. A phaseout of personal exemptions will be restored in 2013 for taxpayers above a certain threshold. As a result, high-income households may not be able use personal deductions in full. Decreased estate, gift and generation-skipping transfer tax Reverts to pre-2001 levels. The estate and gift tax exemption level will be decreased from $5 million to $1 million, while the top tax rate will increase from 35 percent to 55 percent. Alternative Minimum Tax inflation adjustment (“AMT Patch”) An additional 28 million taxpayers will be subject to the AMT because the amount of income exempt from the AMT would revert back to $33,750 for single taxpayers and $45,000 for married couples filing jointly, down from $48,450 for single taxpayers and $74,450 for married couples filing jointly for 2012.
How much this will cost you in additional taxes for 2013? It depends on your income. The Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, has calculated that households in the lowest 20 percent of earners would pay an average of $412 more than in 2012, and that middle-income families would pay about $2,000 more. The top 20 percent of earners would pay an average $14,000 more, and the top 1 percent $121,000 more.