Fiscal Cliff: A Primer

Expiring tax breaks coupled with government spending cuts scheduled to begin with the new year have led to concern that a recession will result.  The lame-duck Congress meets this week, and while I don’t have high expectations for a clear tax policy by year-end, I am hopeful that some of the expiring tax breaks (listed below) will be addressed.

Expiring Tax Breaks:

  • 6 tax brackets (10, 15, 25, 28, 33, 35) will revert to 5 tax brackets (15, 28, 31, 36, 39.6)
  • Long-term Capital Gains maximum tax rate will increase from 15% to 20% and dividends will be taxed as ordinary income
  • The temporary 2% reduction in the Social Security portion of the FICA payroll tax will expire at year-end
  • Lower AMT exemption amounts will disappear
  • High AGI households will lose itemized deductions and dependency exemptions
  • The estate tax will revert to the top rate of 55% with a $1 million exemption
  • The IRA charitable rollover/distribution has not been approved for 2012

New Taxes on High Income Individuals ($250,000 AGI MFJ, $200,000 AGI Single):

  • Payroll tax increase of 0.9% for Medicare
  • 3.8% Medicare contribution tax on unearned income