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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.
Here's why…
"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.
Its almost as if the author of this article does not realize that letting taxes go up and forcing government spending to go DOWN is EXACTLY the recipe for FINALLY BALANCING THE FEDERAL BUDGET. I don't know about the rest of you, but I am seriously worried about the never ending increase in our national debt! And my KIDS are TERRIFIED about having to pay for it!
Well we are in debt, thanks to these tax cuts. So it makes sense to get out of debt that we have to raise taxes. Where else does the government get the money from? The sooner these debts are paid off, the less interest we will have to pay off on them. It has been said over and over the best investment is to pay off loans so you don't accrue even more interest. Why would Money Morning have a problem with this? Before Reagan's huge tax cuts, the country was in less then 1 trillion dollars in debt.
If this is allowed to happen, everyone in
Washington should be removed from office. This is truly sickening!
OK I can't wait for you to take 40% of my money right off the top!
And you complain about the gov. Hypocrites.
The "bipartisan" committee for a responsible federal budget??? You goppers are priceless! Please keep your anti-American ideas on your side!
Tom Praska
"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%. "
this maybe semantics.. but why is it that the brackets merely 'jump' for middle and low income tax brackets, but SOAR for the high tax bracket? when you look at it EVERYONE is being raised a 3-5%.. ironically it is the lowest tax bracket that is raised the most at 5%….
HMMM.. Don, you need to align your verbal skills with some math skills… the 10% actually is the one bracket doing the SOARING!
How can you expect me to trust one word written in this article when 'buy gold" is mentioned eight times, there is a pop-up ad you cannot exit from that explains "How to Buy Gold" and all side ads are how to profit from gold. I wouldn't believe anything you wrote as it appears to be blatant advertising and not news. Shame on you.
So this is the best government money can buy? As long as they get theirs, the rest of us can suffer. There is enough blame for both sides of the aisle. Supposedly Nero fiddled while Rome burned. Now we know what it looked like to the ancient Romans.
The American voters need to "term limit" every politician in Washington, DC who has been in office for 2 or more consecutive terms because these politicians are playing the blame game on each other; consequently, very little if anything is getting done. They owe their loyalty to their politicial party and to lobbyists. We have term limits for presidents and governors, and it's time to do the same for all state and federal politicians to make them accountable to the public. In my humble opinion.
I do not plan to buy gold. Those investors that fell for that ruse last time lost money – – the more gold purchased at $1900 per ounce the more one lost. I will sit on the stocks I have now, and when (and if) the terrible things happen that you suggest, I will buy – – buy — buy dividend paying stocks.
I will buy Deere and Company, Caterpillar and Cummings. Why?
The Republican Party will maintain control of the House of Representatives, increase Republican seats in the Senate, and Mitt Romney will be in the White House. Federal spending will increase suddenly by leaps and bounds when that happens. The increases in the deficit will be blamed on the Obama Administration.
Government subsidies will be increased to record levels for agriculture to satisfy the farm belt Republican states voters. The infrastructure programs will dwarf any programs of the past to put construction workers back on the job. They may even throw in a war with Iran or Syria or both.
The result will be increased sales by Deere and Company, Caterpillar, and Cummings diesel to meet the demands of the subsidized projects. Deere and Company has paid a dividend every year since 1937. Caterpillar and Cummings have similar records despite economic ups and downs. Sales will boom for those entities. My estimate is that the time to sell off stocks will be between 24 and 36 months after January 20, 2013.
Unemployment stats will show a marked reduction initially. But – – that shot in the arm will bust like the other bubbles the Republican leaders have created. The rich will end up richer – – like me- – and the poor will get poorer. And the whole mess will again fall to the laps of a Democratic Administration – – deeply in debt, high unemployment, foreign policy in shambles.
God Bless America!
So, we on the one hand have 'taxmageddon' that will raise badly-needed revenue. On the other, we have spending cuts that you say could cripple the economy. Without taxmageddon, how can we avoid the crippling cuts? How many ways to you want to have it at one time?
We are paying the lowest tax rates in my lifetime and I have been retired for 14 years. We must pay higher taxes or see our way of life end. Wake UP!!!
Do you remember how the boom times of the nineties started? There was great distrust about America's ability to handle its fiscal problems. Clinton and the Republicans passed the deficit reduction bill, which was a tax hike. That settled the money markets down, cheap money became widely available, and we had the biggest boom ever.
The most important thing is that our government show fiscal responsibility, otherwise we will suffer what Europe is getting now.
Government overspending must be tackled at the time when the politicians are voting on approving spending bills. Stop buying military toys, stop the federal government paying for state government programs, stop business subsidies, close tax loopholes.
If we do that, we will have plenty of money.
Personally, I believe that going back to the tax structure that gave us the boom time of the nineties is a GREAT move. If we have to pay a little more, that's OK with me.
So for the poor, tax rates go up by 50%. Yawn. For the rich, going up by 10% is "soaring"! And paying the same rate on unearned income as earned income — "whopping"!
Shows your values. And you are right — things were so horrible under Clinton and these tax rates!
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