Does talk about the fiscal deal give you a headache? Does the phrase “fiscal cliff” alone make you want to crawl into a hole? Well you’re in luck because that’s why MyBankTracker is here, to give you a brief rundown of some of the things you need to know about how the fiscal deal affects you and your taxes.
If you’ve been following the fiscal cliff debacle, then you know that deliberation has mostly been at a stalemate, until a last-minute congressional session — held over the holiday weekend — led to some semblance of a deal. Here are four important points regarding taxes that the deal touches on:
1. Payroll tax holiday is over
The first thing to know about the fiscal cliff deal is that the payroll tax holiday for all American workers is over. A tax cut that President Obama passed in 2010 — lowering the payroll tax from 6.2 percent to 4.2 percent — expired as of New Year’s Eve. Payroll taxes go back up to 6.2 percent and the additional 2 percent goes into effect immediately and will be reflected in as early as your next paycheck. If you earn $50,000 a year, you will be paying about an extra $1,000 in taxes.
2. The $200,000 to $400,000 bracket
Although President Obama campaigned for increased taxes for earners of over $200,000, the fiscal deal tax hike only affects high earners of over $400,000. For individual earners making more than $200,000 (and joint earners making more than $250,000) but less than $400,000 ($450,000 for joint earners), tax rates stay the same at 35 percent. Tax-rates for single incomes over $400,000 or joint incomes over $450,000 have now increased to 39.6 percent.
3. Higher taxes on capital gains
For those with investments — including capital gains and dividends — earnings over $200,000 (individual) or $250,000 (joint) will be taxed at 15 percent, which is the same as it has been. However, there is now a new tax in place: an additional 3.8 percent of your earnings goes towards funding the Patient Protection and Affordable Care Act, or Obamacare. For individual investment returns over $400,000 or joint returns over $450,000, the rate is 20 percent plus the additional 3.8 percent tax.
The new Obamacare tax also impacts incomes over $200,000 for individuals, or $250,000 for joint earners, but it will be at 0.9 percent.
4. Miscellaneous items
- The Child Tax Credit, American Opportunity Tax Credit and Earned Income Tax for low-income Americans will be extended for five years.
- Federal unemployment benefits have been extended for a year for those who have been unemployed for longer than 26 weeks.
Even after all that deliberation, however, problems with the debt ceiling haven’t been addressed. That other mountain of a problem is being stalled until the end of February, so that will be another headache for March.
In the meantime, earners from all tax brackets should anticipate changes to their income and investment earnings if applicable. The new taxes don’t seem drastic, but they do add up, so after arming yourself with information on what they are and when they’re going to take place, it’s best to account for them as early as possible so you’re not in for a surprise when you next get paid.