By Don Miller, Contributing Writer, Money Morning
A slow moving train wreck known as "Taxmageddon" is creeping toward U.S. taxpayers.
You see, if Congress doesn't act by year's end, numerous tax breaks will expire — and hit every American taxpayer squarely in the wallet.
It's a fiscal tsunami that will strike as early as December. The damage will be so widespread it could derail the entire U.S. economy.
Nobody in Washington, however, is doing anything about it.
"You just don't get the sense that there's even a secret plan yet," Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, told The Washington Post. "It's scary."
If you're not worried yet, you should be.
"Taxmageddon" Means Higher Taxes for All
The Bush-era tax cuts will end on Jan. 1, 2013, unless Congress intervenes.
Also set to expire that day will be a temporary payroll-tax holiday on social security.
The tax changes won't just slam a few income brackets; they'll reach all taxpayers.
Every one of the existing income tax brackets will be ratcheted up, starting with the lowest 10% bracket, which will be hiked to 15%. The 25% bracket will jump to 28%; the 28% bracket will go to 31%; the 33% bracket will be replaced by a 36% bracket and the 35% bracket will soar to 39.6%.
Stock market investors will also be punished.
Right now, the maximum tax rate on long-term capital gains and dividends is only 15%. Starting next year, the maximum rate on long-term gains is scheduled to increase to 20%.
But get this — the maximum rate on dividends will skyrocket to a whopping 39.6%.
That's not all.
Investors in the two lowest income brackets who currently pay 0% will have to shell out 10% on long-term gains and 15% and 28% on dividends.
The death of the Bush tax cuts also kills temporary federal estate and gift tax breaks and a measure to ease the marriage penalty for low and middle income couples.
On top of that, workers will lose a 2% cut on social security taxes. That means an average $1,000 tax increase come Jan. 1 for virtually all workers.
In other words, if Congress fails to act, "Taxmageddon" assures that we will all be paying higher taxes next year.
Driving off a "Fiscal Cliff"
Not only are taxes scheduled to go up, but the entire economy could be crippled by a slate of automatic spending cuts set to take effect on Jan. 1, 2013.
Roughly $1.2 trillion in government spending cuts will kick in, stemming from the failure of last summer's "super committee" to produce a deficit-cutting agreement.
A Congressional Budget Office report issued last month said the economy would shrink by 1.3% in the first half of next year if our legislators drive us off this so-called "fiscal cliff."
Washington is already filled with people warning of disaster if the cuts go into effect. Hospital executives have besieged Washington with complaints about scheduled cuts in Medicare. Officials at colleges and universities from around the country are raising red flags over big cuts in federal research grants.
Executives from Lockheed Martin Corp. (NYSE: LMT) and other aerospace companies even passed out digital countdown clocks ticking off the seconds until "over 1 million American jobs" will be lost to Defense Department budget cuts, The Washington Post reported.
"How do you plan for chaos?" Marion Blakey, president of the Aerospace Industries Association, posed to the Post during a break between meetings with lawmakers last week. "There's so much at stake. And there's nothing that inspires confidence that this will get done."
In fact, the uncertainty may already be hurting the economy.
If you don’t want to suffer from a capital gains nightmare next year, now is the time to move your funds into hard assets – like gold. Not only will holding physical gold protect you from inflation, it will also give you some tidy profits once “Taxmageddon” starts dragging down the U.S. economy next year.
Getting started isn’t as difficult as you may think. We give you all the tools you’ll need in our latest special report. You can find it here.
And if Congress doesn't get its act together in time, you should prepare your own finances for "Taxmageddon". Here are a few steps you can take to protect yourself and those you love:
- Make sure any inheritance or large financial gifts you're planning to give make it under the deadline. Family and friends may find the timing odd, but they'll definitely appreciate not having to pay that higher tax later on.
- Move a good chunk of your assets out of stocks and into gold. Owning physical gold will protect you from "Taxmageddon's" negative side effects – like higher inflation, poor U.S. economic performance and sell offs in the markets.
Editor's Note: You can find some excellent resources, including the names and web sites of safe, respected gold dealers and a list of where you can buy gold "certificates", in our special report How to Buy Gold.
- And of course, sit down with your personal tax advisor and have a long, in-depth conversation about how the expiring tax laws will affect your assets – before the new rules come into effect.
Many businesses say they will consider laying off workers or cut back on capital spending before the end of the year if Congress doesn't act.
Stalemate in Washington
Meanwhile, the Democratic Senate and the Republican House seem more interested in drawing lines in the political sand than finding meaningful solutions.
The White House and Senate Majority Leader Harry Reid, D-NV, insist they won't take action on the expiring tax cuts or the spending cuts unless Republicans agree to put higher taxes on the table.
For their part, Republicans are focused on the national debt, which is set to exceed its legal limit in January — right when the spending cuts and tax hikes will hit.
"You can call this a fiscal cliff…or Taxmageddon," said Sen. Orrin Hatch, R-UT. "Whatever you call it, it will be a disaster for the middle class. And for the small businesses that will be the engine of our economic recovery."
Most observers believe legislators won't do anything until after the November elections.
More likely, the whole mess will be kicked down the road so the newly-elected Congress and whoever occupies the White House can deal with it in 2013.
Maybe it's time to send a message to your current Congressman to do something to defuse the ticking Taxmageddon time bomb.