Friday, January 04, 2013

What the Fiscal Cliff Aversion Means For You


The fiscal cliff is a term used to describe the sharp decline in the budget deficit and is the difference between what the government receives in revenues and what it spends.  The fiscal cliff battle lasted for almost two months with fighting and negative and snide remarks from the house and senate, all promising to do this or that.  Well the fiscal cliff has been averted thanks to President Obama but there is still work to do.  

The aversion of the fiscal cliff prevented taxes going up for 98% of Americans, and 97% of small businesses and helped President Obama keep his promise he made in 2011. As a result, more mmillionaires and billionaires will pay more in taxes to reduce the deficit through a combination of permanent tax rate increases and reduced tax benefits.  This is a huge victory for all Americans.  Finally Congress decided to put their egos aside and worked together like a team.  Here are some of the many benefits to Americans:

  1. Tax increases will raise around $600 billion over the next decade.
  2. The Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit were extended for the next 5 years.
  3. There will be no cuts to Medicaid, Medicare or Social Security.
  4. Temporary business tax breaks will be extended through 2013.
  5. Federal benefits will be extended for those unemployed for more than 26 weeks.
  6. A nine month farm bill will avoid milk doubling in price in 2013.
  7. The payroll tax will expire and raises taxes on 77% of Americans. The average taxpayer will pay approximately $700 more in taxes. This was a temporary benefit to help Americans.
  8. Tax rates will increase for families with income more than $450,000 and individuals making more than $400,000.
  9. American families making $450,000 or individuals making $400,000 will pay 20% on capital gains and dividends. Everyone else will pay 15%.  Estate tax will be 40% for the wealthy.
  10. The Personal Exemption Phase out threshold will start at $250,000 and the itemized deduction limitation starts at $300,000 for the wealthy.
  11. The Alternative Minimum Tax will be adjusted for inflation.
  12. Tax rates for 2013 will be: 10%, 15%, 25%, 28%, 33%, and 35%.  A new rate will be implemented for income over $400,000 single, $425,000 head of household, and $450,000 married filing jointly.
  13. In 2013 the personal exemptions and itemized deductions phase out threshold will start at $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.
  14. For Roth IRA conversions in 2013, individuals can convert a portion of their balance in an employer plan to a Roth IRA and there is no early withdrawal penalty.
  15. Expanded the standard deduction for joint filers to twice the deduction for single filers and made it a permanent extension.
  16. Expanded child and dependent care credit rules, including a permanent extension of the 35% dependent care credit applicable to eligible child care expenses for children under age 13, disabled dependents and the $10,000 credit for qualified adoption expenses.
  17. Enhanced rules for student loan interest deductions beyond 60 months and increased the income phase out range and made it a permanent extension.
  18. Made the employer provided child care credit a permanent extension.
  19. American Opportunity Tax Credit which includes four years of schooling, an increase to the income limits for credit eligibility purposes, allowing up to 40% of the credit to be refunded, and an expansion of eligible expenses is extended through 2018.
  20. Deduction for certain expenses of elementary and secondary school teachers is extended through 2013.
  21. One year extension of 50% bonus depreciation rules for qualified business property placed in service before January 1, 2014.
  22. Fifteen year straight-line cost recovery for qualified leasehold business improvements, qualified restaurant buildings and improvements, and qualified retail improvements retroactively extended through 2013.
  23. Extends the ceiling limit and phase out thresholds to tax years 2012 and 2013 for small business expensing under section 179. The limitation is raised to $500,000 and is reduced if the cost of property placed in service exceeds $2 million. Within the thresholds, a taxpayer can expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
  24. Work Opportunity Tax Credit retroactively extended for 2 years through 2013 which is based on a percentage of wages paid to newly hired employees meeting specific qualifications.
  25. Active Duty Member Wage Credit is an employer wage credit for employees who are active duty members of the uniformed services and is retroactively extended for 2 years through 2013.
  26. Energy Credits extended through 2013 including: non-business energy property credit for energy efficient existing homes, credit for energy efficient new homes, cellulosic biofuel producer credit, credits for facilities producing energy from certain renewable resources, and credit for energy efficient appliances.
  27. New Markets Tax Credit retroactively extended for 2 years through 2013 which provides a 39% credit over 7 years for equity investments in certified Community Development Entities.
The best way to shield yourself from what happens in the world is to make a financial plan. This includes having adequate insurance, eating healthy, exercising, minimizing stress, enjoying life, having at least one year’s salary in a savings account, having an adequate retirement account balance and living a modest lifestyle. Make better financial choices in 2013 so you don’t have your own personal fiscal cliff.

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