At midnight last Monday, we launched ourselves off the dreaded "fiscal cliff." Less than a day later, the Statesmen who rule from on high in what Donald Trump famously called "Disneyland on the Potomac" passed legislation planting most of us back on safe ground. Call it a "bungee jump" off the fiscal cliff, complete with dunking our heads in the river below.
Makes it sound rather exhilarating, doesn’t it? Problem is, everyone’s taxes went up anyway. Here’s why:
- FICA and Medicare taxes are back to 15.3% of earned or self-employment income, up from 13.3%.
- Don’t have earned income? The Bush tax cuts are restored for income up to $400,000 ($450,000 for joint filers). Rates for income above those ceilings rise to 39.6% for ordinary income and 20% for qualified corporate dividends and long-term capital gains
- The estate tax “unified credit” amount that you can bequeath tax-free remains at $5 million, indexed for inflation. The actual rate rises from 35% to 40%.
There was good news – the AMT patch I warned about last time was ‘permanently’ extended and indexed for inflation. That helps middle income taxpayers, but the tax increases affect virtually everyone paying taxes.
What should you do about this? Make sure you plan for your reduced disposable income. Talk to your tax professional before ‘the season’ starts (January 27 or so). And, revel in our shared joy that the term’ fiscal cliff’ will quickly fade from our lexicon.