According to The Oxford Handbook of State and Local Government Finance (2012), U.S. taxpayer households may soon pay an average increase of greater than $3,400 in 2013 if Congress does not deter an anticipated “fiscal cliff.” This so-called event, named by Chairman of the Federal Reserve Board Ben Bernanke, is slated to occur when a series of scheduled payments begins at year-end 2012 through 2013. Payroll tax relief, Bush administration tax cuts, and a variety of current administration tax provisions, add up to tax increases in 2013.
Why the U.S. Faces New Tax Increases
Federal bills coming due include a first installment payment of $1.2 trillion for defense and domestic programs. To avert the fiscal cataclysm, government officials may need to agree to raise the government debt ceiling again.
Average Federal Tax Rate May Reach 24.3 Percent, Up 5 Percent
During fiscal year 2013, tax increases of approximately 20 percent, an increase of $536 billion, are built into the federal financial projections.
Congress meets after Election Day to battle over tax increases and/or spending cuts that begin in January 2013.
The Tax Policy Center, co-funded by the Brookings Institution and Urban Institute, projects that the nation’s top percent of earners may see net income fall by approximately 10-1/2 percent without Congressional intervention. These households would pay more than $120,500 a year in new taxes. The top tax rate would rise to 39.6 percent, rising from the current top statutory tax rate of 35 percent.
The nation’s most affluent earners would also pay higher rates on dividend income, capital gains and estate taxes. The highest capital gains rate will rise to 23.8 percent from a current 15 percent rate. The alternative minimum tax would swell to include almost 22 million U.S. households, rising more than five times’ the current 4 million households paying this tax.
Middle class families, with incomes of $40,000 to $60,000 per year, bear an additional tax of approximately $2,000 (an increase of about five percent).
Most U.S. Households Face Tax Increases Next Year
According to the Tax Policy Center, almost 90 percent of U.S. households face a tax increase in 2013. Only the nation’s poorest citizens (including seniors living on Social Security) or those whose income is not subject to an increased payroll tax will not pay by higher tax rates in 2013:
Approximately two percent of the nation’s households face the highest tax increases in 2013. The Democratic Party hopes to allow most current tax relief to expire for the nation’s top two percent of earners.
Households with incomes greater than $200,000 per year (for individuals) and $250,000 for married taxpayers would pay higher taxes in 2013.
Lower income households (those earning less than $40,000 per year) also face difficult to shoulder tax burdens, such as soon to expire child tax credit expansions or earned income tax credits.
Middle class households must pay higher income tax and payroll tax rates without Congressional intervention in 2013.
This is a sponsored post by Todd S. Unger, a seasoned tax attorney for IRSProblemSolve.com, who likes to weigh in on personal finances and taxes.