How much will your taxes go up if US falls off 'fiscal cliff'? (+video)
Congress has put off dealing with the fiscal cliff – a huge suite of legislation – until after the Nov. 6 election. If it doesn't do something by Dec. 31, taxes will go up on virtually everyone.
How bad will your tax bite be next year?
Bad, real bad, if Congress and the White House can’t reach a compromise on the "fiscal cliff" – the enormous suite of fiscal laws that are set to expire or take effect at the end of the year, and that include the expiration of Bush-era tax cuts as well as other tax credits.
The scale of that fiscal cliff – what will happen to the tax bills of 158 million households – is now coming into closer focus. And the view is daunting for just about everyone who collects a paycheck, deposits dividends, or gets a tax credit of some sort.
On Monday, the nonpartisan Tax Policy Center issued a report that finds that Americans will pay an additional $536 billion in taxes next year if there is no compromise. That works out, on average, to about $3,500 per household.
“That frankly is a lot of money,” said Donald Marron, the director of the TPC, which is a joint venture between the Urban Institute and the Brookings Institution.
According to the report – introduced at a press conference on Monday – almost no one will be spared. About 88 percent of all households will see their taxes rise. Middle-income households will see an average increase of about $2,000. Low-income households will see an average increase of $412, and upper-income people will pay an additional $14,173 on average.
Among the reasons:
- Congress has also not renewed a “patch” that amends the alternative minimum tax (AMT). Without it, some 20 million more Americans will be forced to pay the tax on their 2012 tax returns to be filed on April 15.
- The estate tax will hit more than 10 times more estates than in 2012.
- The expiration of a variety of tax cuts, including the Bush-era tax cuts and some that were part of the Obama stimulus, means almost everyone’s income-tax rate will rise, on average, by 20 percent. The average federal income-tax rate for everyone, including corporations, will rise from 19 percent to 24 percent.
- Higher payroll taxes for Social Security and Medicare will kick in.
The payroll taxes will take effect in “the first paycheck,” says Roberton Williams, a senior fellow at the TPC in an interview. “Roughly 2 percent more will be taken out.”
Congress and the White House had agreed to extend the temporary cut in Social Security taxes only through the end of this year in an effort to give the economy a boost. Neither party has shown an inclination to renew those cuts in part because it takes money away from the Social Security trust fund and increases the budget deficit.
Taxpayers will also notice that their employer is likely to receive a new schedule of withholding from the government. This will increase the amount of money automatically withheld.
This reflects the expiration of the various tax cuts.
Looking at taxes paid on cash income, here’s how the TPC estimates the looming deadline could affect you:
Households that make under $20,113. The average tax bill for these 40 million households will rise $412, reducing their after-tax income by 3.7 percent. Currently, they pay 0.6 percent of their income in taxes; in 2013 it will rise to 4.3 percent, an increase of 3.7 percentage points.
Households that make up to $39,790. The average tax bill for these 36 million households will rise $1,231, reducing their after-tax income by 4.5 percent. This is an increase of 4.1 percentage points in their average federal-tax rate.
Households that make up to $64,484. The average tax bill for these 31 million households will rise $1,984, reducing their after-tax income by 4.4 percent. This is an increase of 3.8 percentage points in their average federal-tax rate.
Households that make up to $108,266. The average tax bill for these 26 million households will rise $3,540, reducing their after-tax income by 5.1 percent. This is an increase of 4.2 percentage points in their average federal-tax rate.
Households that make more than $108,266. The average tax bill for these 23 million households will rise $14,173, reducing their after-tax income by 7.7 percent. This is an increase of 5.8 percentage points in their average federal-tax rate.
The TPC also calculated the increase in taxes on the ultrarich – those in the top 1 percent who make more than $506,210. They will owe Uncle Sam on average $120,537 more – or about 10.5 percent of their after-tax income. This would increase their taxes by 7.2 percentage points.
And for those who go beyond ultrarich – some 117,000 taxpayers who earned on average $2.6 million – their tax bill will rise by $633,946, or 11.8 percent of their after-tax income. Their average tax rate rises the most – 7.9 percentage points.
“Households at the highest income levels would be particularly affected by the expiration of the [Bush] tax cuts and by the new health reform taxes,” says the report.
Under Obama health-care law, couples filing jointly will pay an additional 0.9 percent on earnings over $250,000 and 3.8 percent on investment income over that level.
If all these tax increases were to take place without a commensurate increase in government spending, independent economists expect it will send the economy into a tailspin. That’s because more than $500 billion would be taken out of the economy, or about 3 to 4 percent of gross domestic product.
“That’s a big hit,” says Mr. Williams. “There are estimates the economy in 2013 would go into a recession almost right away.”
Of course, Congress and the White House are well aware this. The question is when and how they agree to act.
Nothing is scheduled before Nov. 13 – a week after the election, says Pete Davis of Davis Capital Investment Ideas, which follows Washington affairs for Wall Street. Even if deals are struck, leaving things late “could create real trouble for the Internal Revenue Service,” he says. “It could delay some refunds. In fact, it could get a lot worse – they may not be able to process many returns at all.”