The Fiscal Cliff Deal: The Impact of Increasing Revenues

by AJTrenkle on Wednesday, December 5th, 2012 | No Comments

It slowly looks like the two sides in the deficit reduction/fiscal cliff negotiations are moving towards an idea of what a deal might look like. Granted, no one agrees on specifics but it seems to be that at least on the revenue side (ie increasing tax income for the government and thereby increasing taxes paid by you) we are starting to agree on the issues we are arguing about. This is no small thing. Here are a few of the major topics Republicans, Democrats, and the White House are arguing over. This probably indicates some of these will eventually change and you therefore might want to mentally prepare for it.

While going through this list it might be a good idea to have this tax calculator loaded in another browser window, and some of your income paperwork handy. You will probably be surprised how much of an impact some of the deductions might have on your pocket. My colleague, when we were discussing the issues, said that for middle class people “their life wouldn’t exist without the Federal government’s benefits” and he is largely right. This is one reason why proposals like a flat tax almost always fail politically except with high income earners. But I digress, here are the issues on the table:

1. Raising rates on top earners. This will probably happen, the top rate right now is 35% for individuals and families making over $388,000, meaning they pay that tax on every dollar after $388,000. They are set to go up automatically with the expiration of the Bush cuts. Democrats would like to see this raised to 39% for those over $400,000 and also raise the bracket below this for those making over $200,000 roughly enough to put you in the top 1% of households. This will happen as the President seems to be making this his key sticking point in any deal and it will happen automatically if no deal is reached. Democrats can say the GOP held middle class hostage for the sake of high-earners,probably devastating them in the next election and perhaps giving them even more leverage if we temporarily went over the cliff and the press howled.

2. Deductions. Again, this is where it is helpful to have that calculator I mentioned handy. The big deductions are all on the table, but since middle class people marginally get more value from them, it is hard to figure out a system that only bites the wealthy. Some have proposed a $250,000 cap on all deductions, but this would likely devastate charities, universities, and hospitals who rely on large charitable giving from the affluent above this level. The big deductions that could change are:

Home Mortgage Interest: probably puts at least a couple thousand bucks in most middle class peoples wallets. Check out your info on the calculator, plug everything in and then add in this deduction and see how much the numbers change
Health Insurance Deduction: Another biggie. Many have expensive policies between $5000-$12000. The way this works is that anything you pay to health insurance is income that “disappears” to the government thus lowering your perceived income and therefore your taxes. Many working people see extra cash on each of their take home checks because of this, probably a hundred bucks at least.
State and Local Taxes: Particularly if you are relatively wealthy and live in a relatively high tax area, this is another large deduction again potentially saving close to a thousand of dollars for people in the upper middle class.
Charitable Deductions: Something most use to donate to their church, charity, or university of choice. Many give small amounts but the top 1% of folks often give much larger sums and these are the lifeblood of these organizations. Again, run the numbers for yourself but this is one of those tax breaks that makes the government poorer but probably vastly improves society and our civic life.