What’s the Deal With The Fiscal Cliff – Is It Just Smoke and Mirrors?

Anyone reading the news in the past several weeks has been bombarded with the “fiscal cliff” – a proposed increase to federal taxes resulting from the expiration of previous Bush era tax cuts; originally designed to as an imputes to stimulate the struggling economy. On December 31st, competing Democratic and Republican law makers claimed “victory” that a settlement has been reached averting many of the expiring tax cuts to protect your economic interests.

Has Congress once again once again overcomplicated the issues threw up smoke and mirrors in an attempt to distract you from seeing the picture of what’s really going on here?

Perhaps the biggest issue of concern amongst taxpayers was exactly who would be impacted by the proposed tax increases. Proposed tax increases were to impact those families making over $450,000 annually – a politically correct maneuver as such increases only impact a very small percentage of the population. To further complicate the issue, dangling above was the consideration to increase the tax base to those families earning $250,000 or more – still somewhat politically correct, but certainly impacting a larger percentage of taxpayers, especially those more educated who can more clearly understand the issues and voice their concerns.

To further complicate matters (more smoke and mirrors) of consideration was the threat to many of popular tax deductions or benefits such as the popular marriage penalty relief provision, exemptions, child tax credits, child care credits, tuition and student loan deductions and the all so unpopular alternative minimum taxes.

Currently, there’s been acceptance by both parties of this negotiated settlement that’s simply awaiting final approval before implemented (something that’s sure to happen at the time of this writing). But what’s really going on here?

The Real Story

The real story is that the tax impact that may affect you is the increase to payroll taxes beginning January 1st. Payroll taxes are going to increase 2% on you wages meaning that if you earn $50,000 a year, you’re going to see a decrease in your paycheck by $1,000 over the next year. If your spouse works and earns roughly the same, your family’s disposable income will decrease around $2,000 in 2013 and perhaps each year hereafter. Specifically, its an increase on social security taxes on the first $100,000 or so of wages.

Now it’s not like this was hidden from you. Clearly not! In fact, it was in plain sight from the beginning of all this hoopla. It was just presented to you with so much smoke and mirrors on exactly who is going to be hit with additional income taxes and whether or not your beloved tax deductions would be lost that you lost sight of what’s happening.

And it was presented to you as “an expiration of pre-Bush era tax cuts” as if George Bush had something to do with it. Yes, it was a tax cut presented quite some time ago – but who cares? No matter how you look at it, its an increase to the taxes you’re going to pay!

Now I can go on and on about the impacts affecting the increases to capital gains, increases in the top marginal tax rates, etc. – by why should I? Why get caught up in the details? That would just simply confuse you once again (exactly what Congress has done). The real point is that you’re going to see less money in your paycheck to spend and less money coming into your place of business because there’s going to be less going around.

Will you notice?

Probably not much — after all, this 2% decrease is only $20 a week (on a $50,000 annual salary). And if its “good for the country” – well, you can feel all patriotic about it anyway. But multiply that $2,000 a year by the number of American families and it’s a good start for Congress to start balancing the budget (or at least somewhat reduce the projected deficit for 2013). Unfortunately, its going to take a whole lot more than this tax increase to clean up that mess. Only time will tell.

Mitch Helfer is the managing partner of CPAMiami; a full service public accounting firm providing guidance with federal and state tax matters, tax preparation and strategic consulting, IRS representation and problem resolution. Visit our website at http://www.cpamiami.com for more helpful information and get your tax problems resolved today!

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Comments

  1. Cassy says

    You are so right, fiscal cliff has been all over the news lately. I have never been thinking of the fiscal cliff as if it was some sort of a distraction. But now I will give it a thought. I am not ok with my pay check today and I can hardly imagine government deducting some from it. This is something I am definitely not looking forward. You know, here is a funny thing. They are trying to tell us not to use services like cashadvance stores but they do everything to force us to borrow money. I do not see any logic. All this is just so sad. I can’t believe that this country used to be so strong
  2. Eileen Hess says

    If you’re going to be a regular employee (W2 worker), you’ll need to gross between $90,000-$95,000 to allow for federal/state taxes, Soc. Sec., and health ins. deducts. If you’re going to be paid as a consultant (1099 contractor), then your income will have to be considerably higher to cover the added costs of your health ins. and other benefits. And since you’ll be self-employed, you’ll also have to pay all of your Soc. Sec. contributions (employer normally pays half) plus the federal self-employment tax. If you’re going to work as a self-employed consutant, it’s best to check with a CPA before you decide the income you’ll need.

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