Thursday, January 3, 2013

Tax Impact from Fiscal Cliff Deal

After Congress finally ended the fiscal cliff debacle, for now, I was in search of how exactly the tax brackets would look like.  There's now a ridiculous 7 brackets, this isn't close to the most we've had but it seems overly complicated to me.  The big news for investors is that one the brackets were made permanent, so hopefully tax planning will become easier in the future, or course barring future changes by Congress.  The second is that long term capital gains and dividends will continue to be taxed at the same rate.

But now we have 3 different rates on those.  If you're in the 10% or 15% income bracket your cap. gains/dividend taxes stay at 0%.  In the 25% and higher bracket your cg/d taxes stayed the same at 15%, unless your AGI is above $200,000 for single or $250,000 MFJ, in that case you get the 3.8% Obamacare surtax.  And for AGI's above $400,000 single and $450,000 MFJ, your cg/d taxes increased to 20% plus the Obamacare surtax of 3.8% for a total tax of 23.8%.

The 2% payroll tax cut was not extended.  I personally think they shouldn't have started it in the first place, but was glad to use the extra money to invest.

For a more detailed breakdown check out TaxFoundation.org.

Overall it's not a big change for the majority of tax payers, although almost everyone will see their taxes go up thanks to the payroll tax cut not being extended.  The biggest changes will be effecting really high earners.

The biggest disappointment is that only the tax side of the fiscal cliff was taken care of.  Part of the bill that was passed just kicked the budget/spending cuts down the road 2 months.  So barring a rare change of direction by Congress we can expect to have another potential market shakeup come late February/early March from Fiscal Cliff 2.0.

8 comments:

  1. I was surprised that the payroll tax cut was not extended. Thanks for the breakdown and the link to the taxfoundation.org it really clarified the deal. The deal was very disappointing, I don't understand why investors are excited about it.

    ReplyDelete
    Replies
    1. I think investors are happy about the fact that it finally got settled and several things were made permanent (tax brackets, AMT patch...). I'm glad that dividends didn't revert back to being taxed as normal income, that will make a big difference in my income once I reach early FI.

      The real issue is going to be the upcoming budget/spending cuts. We desperately need to get those in check if we want to continue on as a prosperous nation.

      Thanks for stopping by!

      Delete
  2. I think that 2% will hit a lot of family's hard. Most seem to live paycheck to paycheck and will have to adapt. And it's 2% less that consumers will spend.

    Like you I was hoping they would address everything this time. But being disappointed by these people seems to be the norm.

    Like the link!

    ReplyDelete
    Replies
    1. Gareth,

      Unfortunately that 2% will make a big difference for the average family and in turn possibly investors due to less disposable income.

      I've learned to set my expectations very low for anything the government is involved in. That way I can be pleasantly surprised when they happen to exceed the very low bar.

      Thanks for stopping by!

      Delete
  3. Thanks for the clear review of the tax impact. I agree that SS tax cut of 2% shouldn't have happened in the first place, but I also use that savings to invest it. Now I have to figure out how to stay in 10 or 15% tax bracket. But I will be cooking it with my CPA.

    ReplyDelete
    Replies
    1. Martin,

      I didn't think it should have happened because the SS system is already in dire straits, so bringing even less in to support it didn't sound like a good idea to me. Like you, I just used that extra take home pay to invest towards FI.

      I probably need to get in touch with a good CPA because I'm sure I'm leaving some money on the table when it comes to taxes. But I figured it probably wasn't worth the hassle since I don't really have any itemized deductions that could push us over the standard deduction. No mortgage as of now.

      Thanks for stopping by!

      Delete
  4. Like you point out, this deal isn't all that great. The stock market doesn't like uncertainty and this helped remove some.

    My taxes will be exactly the same as before except the 2% payroll.

    Perhaps saving a little dry powder for the Feb/Mar budget talks would be prudent? Only a week ago there were some decent prices. The value dried up quick!

    ReplyDelete
    Replies
    1. CI,

      For most people that's going to be the only change. Luckily I still fall into that category. Feb/Mar could be interesting dealing with the debt ceiling and the sequestration postponement and I don't expect Congress to make any changes from their past protocol. Delay making a decision until right at the deadline. And nothing major is going to come from their final decision.

      I'm annoyed that most of the value is gone, but I expected that once a deal got reached which something would come, the markets would go gangbusters for at least a day. Let's give it a few months and then we'll try it all over again.

      Thanks for stopping by!

      Delete