In the past two newsletters my feature stories were about the “fiscal cliff” and how things were playing out. The cliff is the combination of tax increases, spending cuts, and the hitting of the debt ceiling limit all happening early 2013. Washington reached a last minute agreement on January 1st to tackle the tax aspect of the cliff. This is a blog post I wrote for The Prime Move, a Hoboken Real Estate website on how Washington and Finance meet.
Congress and President Obama are in the middle of facing a number of serious economic issues: the fiscal cliff, the debt ceiling, a downgraded credit rating, the budget deficit, sequestration, entitlement reform, taxes, spending, high unemployment and a fragile recovery from the recession. Unfortunately for the country, the two branches and the two political parties have been reluctant to agree on many meaningful solutions. Remember, the Democrats control the White House and Senate, and the Republicans control the House of Representatives.
Last year Congress and the President reached a contentious deal to raise the debt ceiling, which is the legal limit the federal government can go into debt, currently over $16 trillion dollars. Because the government keeps spending more every year, it keeps having to raise the debt ceiling.
But because the debt is a serious problem, the two sides agreed to force themselves to confront it in a future deal. Through something called sequestration, the Democrats agreed to face spending cuts to their favorite government programs, and the Republicans agreed to face letting their favorite tax cuts expire.
The debt ceiling deal created the so-called fiscal cliff, where the tax hikes and spending cuts set to happen on January 1 of this year would have threatened the recovery from the recession. President Obama, Senate Democrats and House Republicans did reach a deal to stall going over the cliff (technically we did go over, because they only enacted the deal on January 3rd despite having negotiated since the fall). Here are some of the details:
– The top individual tax rate rises to 39.6% for families with income above $450,000 and individuals above $400,000. Rates for everyone else will stay the same. The 39.6% is a return to Clinton-era rates, and buck the Bush-era tax cuts, which had lowered the top rate to 35%. President Obama compromised with Congressional Republicans, moving from his original position that the rate hikes should affect households making over $250,000.
– The tax on capital gains and dividends – income earned from investing – will rise to 20% for people who pass the $450,000/$400,000 threshold, and will remain at 15% for everyone else.
– People who inherit estates can still exempt the first $5 million from their tax bills, but they’ll have to pay more on the rest, with that rate increasing from 35% to 40%.
– Workers will see less money in their paychecks, because the rate the federal government withholds for Social Security will revert to 6.2%, after it had been 4.2% for the past two years. The government had lowered the rate to encourage more consumer spending, thinking that would boost the sagging economy.
– The current rates for various child, educational, and earned income credits will remain for the next five years.
Just as President Obama compromised on the threshold for income tax increases, House Republicans compromised on spending cuts. The fiscal cliff deal pushes back sequestration — though the Republicans had wanted significant cuts now, they agreed to postpone them for two months.
Which means Congress and the President will have to make another deal soon, around the same time they’ll have to consider raising the debt ceiling again. If that deal is anything like their recent ones, expect it to be messy, minimal and move the heavy lifting to another time. Stay tuned to The Prime Move for updates on how any future deals will affect your finances
Read the entire 157 page deal – http://www.businessinsider.com/breaking-full-text-of-the-157-page-bill-to-avert-the-fiscal-cliff-2013-1