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Fiscal Cliff Dive Converts to Mudslide

Politics aside (because, let’s face it, it’s all about our own, bottom-line individual/household budgets), let’s look at the impact of yesterday’s tax legislation.

As with everything in life, there is good news and bad news. The federal fiscal plunge may not be as steep, but it doesn’t mean there isn’t a murky mess left to deal with.

Overall, the good news is that the literal eleventh-hour tax bill passage averted global economic panic; the overseas stock markets started strong this morning, and for millions of Americans still looking for work, unemployment benefits were restored. The bad news is that the legislation passage acts as yet another government bandaid, offering temporary relief while the underlying issue requires more attention. Every year it seems more commonplace for our country’s leaders to have these last minute tax debates and potential economic threats because the bigger issue, tax reform, is complicated and heated and never addressed in whole. They couldn’t resolve their debate over the debt ceiling, for instance, and what, if any, programs should be cut from government spending, so those issues will be fought over later this month.

For the middle class, there is also good news and bad. The good news is that Earned Income Credits and Child Credits remain in tact, and the annual income threshold increases for the Alternative Minimum Tax are now automatic, negating the need for annual debate and vote (the Alternative Minimum Tax was established in 1969 to ensure the wealthiest households paid at least a minimum tax, even if after all deductions and credits taken the calculations indicated no tax was due. Generally, the AMT affected households with income between $100,000 and $500,000, which was a lot of money in the 1960s, but the $100,000 threshold is more typical of present-day middle class households, which are otherwise struggling with inflation costs, and are harmed by the secondary AMT. Every year, Congress has had to debate and vote on whether to continue the AMT, or agree on increasing the amount of exempt income. Yesterday, Congress agreed to make the threshold income increases occur automatically every year).

Additional good news for most Americans is that, according to Tax Policy Center calculations, only .7 percent of households will be subject to an income tax increase this year, said increase applying almost exclusively to individuals making greater than $400,000 annually (or households making greater than $450,000 annually). But don’t be fooled…most will still be paying more to Uncle Sam in earned income through the payroll tax increase. This is bad news for most Americans, as Congress voted not to continue the lower payroll tax rate holiday of 4.2 percent; it will now be raised to 6.2 percent, affecting approximately seventy-seven percent of households who will pay a larger share of their earnings up to $113,700. For a family making $100,000 annually, this can translate into nearly $200 less every month for their own budget.

The gift for the wealthiest is fewer limits on deductions, for now, than what the President wanted. And the estate tax rate remains at protecting the first $5 million of an inheritance, rather than dropping it to protecting only the first $3.5 million. The bad news for the wealthiest households: more limits on how much can be sheltered legitimately from taxation, and an increase in the marginal tax rate from 35 percent to 39.6 percent (again, applying to individuals earning more than $400,000 and households earning more than $450,000).

So there’s the good and the bad in a nutshell. We may no longer be free-falling, but the feat of getting down the mountain of tax issues is likely to be a dirty one at best, and sliding into the muddy impact of yesterday’s legislation, and what remains to be resolved in Washington, may take years of stick removal and soap to clean.

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