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Fiscal Cliff Deal Tax Changes for 2013
On Dec. 31, 2012 Washington hammered out a last-minute agreement for tax deals to avert the looming fiscal cliff.
A collective sigh of relief could be heard by taxpayers even though Congress did not fix spending cuts.
Now as we begin gathering documents for the April 15 tax filing date, there are new tax laws from the fiscal cliff deal that will affect everyone.
One immediate thing that will be noticed is the Internal Revenue Service (IRS), thanks to the last-minute changes, is processing tax returns at a slower rate.
But it doesn't mean you have to delay things.
U.S. President Barack Obama has said that 98% of Americans will not see their income taxes go up - but take a look to be sure, because there is something for everyone in here.
Your Fiscal Cliff Deal Tax Changes for 2013
First, here's some good news from the tax changes:
- Being married isn't a bad thing! Couplesstill have the standard deduction that's twice that of individuals. For the 2012 tax year, this standard deduction increased to $6,100($12,200 for married couples filing jointly), a rise from $5,950 ($11,900 for married couples filing jointly).
- Many middle-class taxpayers will be protected from the alternative minimum tax (AMT)as the income exemption level will now be permanently adjusted for inflation. This means taxes will be less for the 60 million Americans that would have impacted.
- For homeowners who were either granted principal forgiveness or underwent a short sale or foreclosure, they will not have to pay tax on the forgiven debt amount with the deal's one-year extension.
But, here's where you got hit:
- Say goodbye to the two-year payroll tax holiday. It has expired and now employees' net pay is down two percentage points as 6.2% of Social Security will be taken out of paychecks versus 4.2%. There is $113,700 wage ceiling so any wages over that will be exempt.
- A worker with a $41,000 salary - the national average--will have $32 less in a biweekly paycheck, reported CNN.
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Investment Tips3Here's Why The Fiscal Cliff Deal is Great News For Dividend Stocks
I wish I had a nickel for every scary story I read about dividend stocks and the fiscal cliff over the last four months.
I heard so many, I could probably take the rest of the year off.
Of course, a funny thing happened on the way to this great apocalypse: dividend stocks are not only alive and well, but stronger than ever.
As I wrote a few weeks ago, the Fiscal Cliff fears surrounding income stocks were completely overblown.
And now that a budget agreement has been reached and the tax treatment of dividends is locked in, all of this doom-and-gloom can now be finally put to rest.
With a deal in place, dividends will be taxed as favorably for investors as capital gains. For lower income folks, qualified dividends continue to be taxed at 15%.
It only changes for investors who have met the government's latest definition of "rich."
For those with incomes above $400,000 ($450,000 for a married couple) there is quite a substantial increase in the tax rate on qualified dividends. It rises from 15% to 23.8%, including the 3.8% investment income surcharge in the Obamacare legislation.
However, the capital gains tax in this bracket will rise by the same amount, while interest income will be taxed at 43.4% (39.6% income tax plus the 3.8% Obamacare surcharge.)
That means the relative advantage of qualified dividends over interest income will be preserved, along with the parity between dividend and capital gains tax rates.
So for most dividend investors, very little about their investments has changed.
The difference is that these new rates are permanent - there's no 10-year horizon, as there was with the previous 15% dividend tax rate. So investment planning just got a bit easier.
The bottom line is that with the fiscal cliff deal, there are now three good reasons why dividend stocks are irresistible.
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What the Fiscal Cliff Deal Means for Investing in 2013
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Stock Market TodayStock Market Today: Fiscal Cliff Deal Leads to Rally
Passage of a congressional measure to avert the fiscal cliff gave a big boost to the U.S. stock market today (Wednesday), the first trading day of 2013.
Right out of the gate, all three major indexes jumped. Just before 2 p.m., the Dow Jones Industrial Average had climbed 232 points. The Standard & Poor's 500 Index jumped 25 points, and the Nasdaq rose 70 as markets cheered the news.
"We are happy that we are halfway home to fixing the fiscal cliff; we figured out the revenue side and delayed the spending side," Art Hogan, market strategist at Lazard Capital Markets LLC, told MarketWatch.
The rally followed a late surge Monday, New Year's Eve, when word emerged from Capitol Hill that progress had been made in the fiscal cliff talks, sending the Dow up 166 points by the session's close.
For 2012, the Dow added 7.3%, ending at 13,104.14. The S&P gained 13.4% to finish the year at 1,426.19, and the tech heavy Nasdaq added 15.9% to end 2012 at 3,019.51.
The rally in the stock market today came as investors breathed a sigh of relief that at least a partial deal had been reached.
"What's been hanging over the markets for the last couple of months has finally been released. The rally today (Wednesday) is 100% about the end of the fiscal cliff, and people are buying with both hands," Sean Kelly, a managing director at Knight Capital Group, told CNN Money.
But many analysts cautioned that gains in the stock market today were nothing more than a rally based on relief over the fiscal cliff deal and said the gains may be short-lived.
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What the Fiscal Cliff Deal Could Cost You
A fiscal cliff deal sailed through the Democrat-controlled Senate late in the night on New Year's Eve in an 89-8 vote.
The proposed deal then headed to the Republican-controlled House on New Year's Day, expected to meet at least some opposition from a party that has lobbied during most of the fiscal cliff negations for no tax increases at all. It went through with a 257 - 167 House vote.
At the deal's forefront was maintaining tax cuts for singles earning less than $400,000 and couples earning less than $450,000. The tax increase marks the first time in two decades that rates will rise for the wealthiest Americans.
While it does save millions of middle-class taxpayers from increases, workers will still feel the pinch because the payroll tax holiday has expired.
Also saved were benefits for some two million unemployed workers who were on the brink of losing their federal checks.
The measure postpones the biggest and thorniest part of the fiscal cliff deal until March, when Congress will again have to wrangle over steep spending cuts that were set to kick in on Wednesday to defense and other industries.
Plus, nothing was resolved regarding the $16.4 trillion debt ceiling that we reached Monday.
Here are a few major changes that will hit your paycheck and savings.
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Fiscal Cliff Deal Averts the Crisis… But Now What?
[Singapore] - It's late Tuesday evening and I'm about to go on air with CNBC Asia in Singapore regarding the impact of the Fiscal Cliff bill which passed minutes ago after Republican leaders decided not to try and tack on amendments nor engage in further bickering.
Passed by a 257 to 167 vote, the bill is now headed to the White House and a draft may even be on the President's desk by the time you read this.
So I'll have to write quickly.
Here's the scoop on the fiscal cliff deal:
- The Bush-era income tax cuts become permanent for the majority of workers while they expire for so-called "top" earners. The break is at $400,000 for individuals and $450,000 for couples. That's approximately double Obama's campaign level and 80% more than his preferred "married couples rate" according to various sources. Dividend tax rates and capital gains rates for top earners will rise to 23.8% while personal exemptions and itemized deductions that are presently in force expire for individuals earning more than $250,000 and married couples earning more than $300,000. The alternative minimum tax is now fixed to avoid snagging still more middle class households.
- Expanded unemployment benefits will continue.
- Automatic spending cuts are deferred for two months.
- A two percent payroll tax cut expires.
- Estate taxes will get an inflation indexed exemption of $5 million or more and taxes will top out at 40%.
Key takeaways on the agreement:
- Once again Washington is kicking the can down the road. While it's already being played up by both parties as an example of bipartisanship, it's really a load of hooey. The bill merely puts off decisions for yet another round of fiscal follies a few months from now.
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The Fiscal CliffWhat if There's No Fiscal Cliff Deal?
Just hours remain for Democrats and Republicans to come up with some kind of fiscal cliff deal to avert the $600 billion in tax increases and spending cuts that are set to kick in tomorrow, Jan. 1.
With both parties still at odds, a tumble over the cliff looks likely.
The only thing that's likely to happen is a very rushed deal that fails to deliver significant changes to the pre-programmed tax hikes and spending cuts.
There were small signs of optimism out of Washington.
"The discussions are going very well," Republican Sen. Bob Corker told CNBC's "Squawk Box" early Monday morning, adding though that the agreement probably won't include significant moves on deficit reductions.
But Senate Majority Leader Harry Reid, D-NV, maintains that a deal is not likely.
"There is significant distance between both sides," Reid said Sunday night.
Lawmakers reconvened today (Monday) and will remain holed up on Capitol Hill perhaps late into the night.
Here's what to expect if we fall off the fiscal cliff.
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The Fiscal CliffFiscal Cliff Deal Gets Lost in "Blame Game"
U.S. lawmakers headed back to Capitol Hill Thursday to try and avoid falling off the fiscal cliff, but the chances of doing so before the New Year have practically disappeared.
Sounding alarm bells Thursday were stern words from Senate Majority Leader Harry Reid, D-NV, who cautioned that there is hardly any time left for a deal.
"I have to be very honest. I don't know time-wise how it can happen now," a pessimistic Reid said in a press conference from the Senate floor.
Acknowledging the urgency for some kind of deal by New Year's Eve, U.S. President Barack Obama cut short his Hawaiian Christmas vacation to return to Washington.
According to CNN, a Republican senator said President Obama told Sen. Mitch McConnell, R-KY, that the president would send a proposal to the GOP on Thursday.
Retiring Rep. Steve LaTourette, R-OH, told CNN that lawmakers are putting finger-pointing ahead of deal making.
"Nobody is willing to pull the trigger" on an agreement because "everybody wants to play the blame game," he said. "This blame game is about to put us over the edge."
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The Fiscal CliffFiscal Cliff Deal Talks on Hold
U.S. President Barack Obama will cut his Hawaiian Christmas vacation short and return to the White House tomorrow (Thursday) to continue fiscal cliff deal negotiations.
Just five days remain for Democrats and Republicans to hammer out some kind of deal before the U.S. economy gets walloped with some $600 billion in tax increases and spending cuts at the federal level.
It's unclear if the parties can reach a fiscal cliff deal before the New Year, although they've shown little hope they can agree.
Republican House Speaker John Boehner on Friday put the burden on the president and the Democrat-controlled Senate to make the next move after they rejected his big concession on tax rates. Boehner agreed to extend tax rates on incomes under $400,000 (reduced from his previous threshold of $1,000,000) in exchange for steep spending cuts to reduce the swollen federal deficit.
"I don't want taxes to go up; Republicans don't want taxes to go up. But we only run the House. Democrats continue to run Washington," a frustrated Boehner said in a press conference Friday after he failed to rally support for his "Plan B," which never even made it to a vote among his own party.
While both sides have reduced expectations for an all-or-nothing deal, the two parties are still miles apart. Lawmakers are already prepping for the blame game should the New Year come without resolution.
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What the Fiscal Cliff Deal Could Do to You
- Money Morning Staff reports
Depending on the deal Congress makes for the fiscal cliff, middle-class Americans could face a total average tax burden of nearly 50%.
Middle-class Americans already pay an average of 43.12% in taxes, according to the non-partisan Tax Foundation.
Money Morning Chief Investment Strategist Keith Fitz-Gerald detailed the possible increase in the tax tab, citing data from FOX Business Network's expert on consumer and personal finance, Gerri Willis.
Absent a fiscal cliff deal, the mean middle class federal tax rate would climb from 25% to 28%, as Bush-era tax cuts expire in 2013. Payroll taxes would rise from 13.3% to 15.3%.
"Keep in mind that doesn't include state income tax hikes, city or county taxes, many of which are on the rise no matter where you live, thanks to decades of poor fiscal management," Fitz-Gerald said.
Add in state taxes, which average 4.82%, and the middle-class tax burden would average a whopping 48%.
As Fitz-Gerald put it, the possible tax increases amount to "an assault on the middle class."
The Most Painful Fiscal Cliff Hit to the Middle Class
The biggest tax increase threatening individuals for the 2012 tax year is a hike in the alternative minimum tax.
