Uncertain economic times may become even more challenging in a matter of months, as millions of Americans could face 2013 riddled with significant tax increases.
If changes are not made in the next few months in Washington, multiple tax cuts will expire at the end of 2012, affecting people at all income levels.
In an effort to help a challenging economy, substantial tax reductions were passed by Congress and signed into law by former President George W. Bush in 2001 and 2003, affecting nearly all taxpayers. The cuts included a new 10 percent tax bracket, expansion of the child tax credit and marginal rate reductions. Since the bills were passed using “reconciliation” under the Congressional Budget Act, lowering the threshold to simple majority, they were restricted to a 10-year window as they affected budget deficits.
President Barack Obama and Congress revisited the need for the tax reductions in 2010 and extended many of the cuts to 2012.
Another Recession Looms
Economists today fear if changes aren’t made to extend the cuts into the new year, Americans could face the largest tax increase since the 1940s. Will McBride, chief economist at the Tax Foundation in Washington, D.C., warned that the possible changes are dramatic enough to cause another recession.
As it stands, a large number of provisions will expire at the end of the year. The standard deduction for married couples, for example, will be reduced, which will affect people filing jointly. The ceiling of the 15 percent bracket for married couples will also be reduced. The 10 percent tax bracket created to help the middle class will expire and revert to 15 percent. The child tax credit, which had increased to $1,000 per child, will revert to $500 per child.
For those with long-term capital gains, the tax rate for middle- and upper-income people would increase to 20 percent from 15 percent. The tax rate on qualified dividends would also increase to ordinary wage tax rates versus 15 percent.
Tax rates would also be affected if an extension is not passed. The tax rate would increase several percentage points; people who pay 25 percent tax would see an increase to 28 percent, and people who currently pay 35 percent rate would see a rise to 39.6 percent.
The list of provisions that will expire is long and includes the making-work-pay credit, Individual Retirement Accounts (IRA) provisions and Earned Income Tax Credit (EITC) eligibility levels.
Tax Bill Could Grow
It is estimated many Americans could have to come up with more than $5,000 per year if the cuts expire at the end of December. According to the nonpartisan Tax Foundation study, Connecticut taxpayers can expect to be hit with an additional $5,783 in taxes for 2013, with New York and New Jersey residents following close behind with an average $5,542 and $5,030, respectively. Residents from Mississippi, according to the study, are likely to pay an additional $1,300 on average. Taxpayers in 29 out of 50 states, they warn, should prepare to pay at least another $2,000 in taxes in the new year.
If Congress doesn’t come to an agreement, economists calculate that between $400 billion and $720 billion will be drained from growth, affecting more than 4 percent of the total gross domestic product. As it is, the economy is on the edge of zero growth, according to many concerned economists, which would immediately affect America’s economic and financial future.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- Ahern, N. (2012, April 11). Fate of Bush Tax Cuts Uncertain As Expiration Approaches. Retrieved from http://taxfoundation.org/article/fate-bush-tax-cuts-uncertain-expiration-approaches
- Cox, Jeff. (2012, August 15). If Bush Tax Cuts End, It Will Cost. A Lot. Retrieved from http://finance.yahoo.com/news/bush-tax-cuts-end-cost-181220449.html
- Bischoff, B. (2012, May 16). What End of Bush Tax Cuts Would Mean for You. Retrieved from: