NetWorth: How the fiscal cliff would affect many taxpayers - East Valley Tribune: Business

NetWorth: How the fiscal cliff would affect many taxpayers

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Posted: Wednesday, November 14, 2012 5:13 pm

If Congress lets the country go off the fiscal cliff, how much will it cost you?

The Tax Policy Center estimates that 90 percent of households would face a tax increase averaging about $3,600 next year, but that number is skewed by large increases at the top of the income scale. The top 1 percent would see their taxes rise by more than $120,000.

Middle-income households -- with income of roughly $40,000 to $65,000 -- would pay about $2,000 more.

These estimates assume that a boggling array of tax breaks approved during the George W. Bush administration expire as scheduled at the end of this year. They also assume that several tax cuts approved during the Obama administration -- including a 2 percentage point decrease in the Social Security portion of payroll taxes -- expire. They further assume that Medicare tax increases on higher-income earners that were approved as part of Obamacare take effect as scheduled next year.

The estimates ignore the impact of other fiscal-cliff happenings, such as automatic cuts in federal spending and an abrupt end to federal extended unemployment benefits.

How cliff diving would affect you depends on your income, marital status, whether you have children, are paying for college, own a business, have income from dividends and capital gains, and are subject to the alternative minimum tax.

Here's a look at some of the potential tax increases and the odds of them taking place.

-- Medicare tax: With President Barack Obama remaining in the White House, the Medicare tax increases are virtually guaranteed to take effect next year. Singles who have more than $200,000 in earned income (from a job or self-employment) and joint filers with more than $250,000 will pay an extra 0.9 percent on earned income that exceeds those limits.

Also, singles with more than $200,000 and joint filers with more than $250,000 in adjusted gross income will pay a 3.8 percent Medicare tax on their investment income, but only up to the difference between their AGI and those limits.

-- Payroll tax cut. With the economy improving, the payroll tax cut is "almost certain to disappear," says Roberton Williams, a senior fellow with the Tax Policy Center. "It was intended to be a temporary stimulus. There is not much appetite for extending it again."

A person earning $50,000 saved $1,000 a year in 2011 and 2012, thanks to the payroll tax cut. If it expires, paychecks will shrink starting in January.

-- Marginal tax rates. The Bush era tax cuts reduced marginal rates to 10, 15, 25, 28, 33 and 35 percent. If they expire, tax rates on 2013 income will go back up to 15, 28, 31, 36 and 39.6 percent.

"Average marginal tax rates would increase for every income group, but would increase the most at the very highest income," the Tax Policy Center says.

Obama wants to keep tax rates where they are for most people but let them rise for "the rich," which he defines as singles with more than $200,000 in adjusted gross income and couples with more than $250,000.

Some Democrats have proposed letting them rise only for people making more than $1 million a year. Republicans are opposed to any increase in marginal rates.

This area would have the biggest impact on the federal budget and is likely to be the most contentious.

"I don't see anything happening before Jan. 1," says Mark Luscombe, a principal tax analyst with CCH. "I haven't seen the Republicans say they will allow an increase on top earners to take effect. After Jan. 1, they will have already taken effect."

At that point, they could approve a tax cut for everyone but the wealthy "without violating their 'no tax increase' pledge," Luscombe says.

-- Capital gains, dividends. The Bush-era tax cuts also reduced the top rate on long-term capital gains to 15 percent from 20 percent and the maximum rate on dividends to 15 percent from 39.6 percent. Barring intervention, they will revert to their previous rates Jan. 1.

Obama has proposed letting them go up on "the rich."

This is another area where Luscombe sees Congress waiting until next year to act. The same goes for a host of other expiring Bush-era tax cuts, such as ones that reduced the marriage penalty and doubled the child tax credit to $1,000.

-- Other Obama-era tax cuts. Ironically, Republicans are not enthusiastic about extending other tax cuts enacted during the Obama years. One expanded the earned income tax credit for larger families and married couples, another increased the refundability of the child tax credit and a third replaced the Hope tax credit for college students with the more-generous American Opportunity Credit. The first two helped lower-income taxpayers, the third also helped middle-income people.

Obama would like to make these permanent, making this another area that's hard to predict.

Reach Kathleen Pender at kpender@sfchronicle.com.

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