We have all been hearing about the Fiscal Cliff and Tax Armageddon but what does it really mean? Fiscal cliff usually refers to the no-return point when the country will experience huge inflation rates and the US is in serious trouble. Tax Armageddon refers to the upcoming tax hike that all Americans will experience if the laws are not changed quickly. It is very real and it is coming our way very quickly.
These are very much related. The increase in taxes across the board will hasten our dive toward the oncoming cliff. In working with my clients on tax planning for 2013, I am seeing an average of a $3,000.00 increase in the amount of tax they will pay for 2013! Keep in mind, that most of my client’s income is between $50,000 and $100,000 per year, normally what is referred to as the Middle Class. For those who make under $25,000 a year, I am projecting an increase of around $500.00 in taxes paid for 2013 and for those who earn over $250,000 an increase of around $5,000.00!
The reason for this jump is because several credits are due to expire at the end of this year. Child tax credits are being cut in half and the marriage penalty is coming back. For those of you who don’t remember what that was, it means that two people with the same income will pay more if they file as a married couple, than if they file as singles. Unfortunately, you don’t have an option of filing as single if you are married. It is either married filing joint, or married filing separately, which is at an even higher rate than married filing jointly.
Other changes include the 179 depreciation being reduced or eliminated for businesses and rental properties. Long term capital gains rates will increase to 20% for most investors. Payroll taxes will increase by 2% for Social Security (this one is not refundable, ever). Even low income taxpayers will be affected due to a decrease in their earned income credits.
Remember, there are also tax credits that will no longer be available for 2012, which you may have taken in 2011. So your 2012 taxes could also be affected. The most significant of these disappearing credits is the qualified tuition credit which helps those who have children in college, and the educator expenses deduction which was for teachers who purchased their own supplies.
If you have not yet hired a tax professional to look over your taxes for 2012, you need to do so before January 1st. After that, it is too late to make any changes that could help your tax situation. At the same time, they should be going over your 2013 forecast to see if you need to make any adjustments to your withholding or estimated tax payments to minimize your liability.