Home About Archives RSS Feed

The Independent Investor: What They Didn't Tell You About the Cliff Deal

By Bill Schmick
iBerkshires Columnist

Now that the country has avoided the Fiscal Cliff, everyone is breathing a sigh of relief. However, there have been some changes in the tax code that many of us have missed in the last-minute negotiations. For starters: your tax bill will be going up in 2013.

Although 99 percent of Americans avoided paying a higher tax rate thanks to Congress, we will all see a 2 percentage point rise in our payroll taxes. That is because neither party had the stomach to extend the tax cut President Obama had enacted in 2011. It means that households making between $50,000 and $75,000, for example, will see a tax increase of about $822 this year, while those making less ($40,000-$50,000) will see a $579 tax hike.

The headline that most Americans understood after the 11th-hour American Taxpayer Relief Act was passed was that those individuals earnings $400,000 and families earning $450,000 would see their tax rates jump from 35 to 39.6 percent. In addition, as part of the law, a new 3.8 percent tax is being levied on investment income for individuals making $200,000 and couples earning $250,000. High-income families will also have to pay higher taxes as part of Obama's health care law.

However, beneath those headline numbers lurks even greater tax increases as a result of the loss of personal tax exemptions for many middle-class income families. Most Americans recognize that $250,000 is a lot of money - if you reside in certain locales — but not much at all if you happen to live in Manhattan, Boston, Chicago or any other high-cost, urban center. Prior to the Tax Relief Act, a family of four, earning $250,000, were benefiting from $3,800 tax exemptions per family member.  

Those advantages have now been erased, effectively raising taxes 4.4 percent for every dollar that family earns over $250,000. If you have six kids, your marginal tax rate jumps to 6 percent and so on.

Higher-income Americans that make more than $1 million could lose up to 80 percent of their itemized deductions for everything from health care, home mortgage deductions, charities and even state and local taxes. When all is said and done, if you add in the loss of exemptions, health-care tax increases, etc., the effective tax rate for the highest earners could be as high as 45 percent.

Unfortunately, taxpayers in many Northeastern states, as well as those on the West Coast, will be hit the most since they normally use itemized tax deductions much more than the national average.

Some real estate-related deductions were preserved, such as allowing taxpayers to exclude income from the discharge of debt on their principal residence. This especially helps those who are considering a short sale or a lender-approved sale for less than the principal mortgage balance. It also allows a deduction for mortgage insurance payments for those making less than $100,000.

Another tax advantage for most Americans is the increase in contribution limits for retirement plans. You can now contribute $500 more to your Individual Traditional or Roth IRA for 2013, bringing the total to $5,500 with a $1,000 "catch-up" contribution for those over age 50.

The same $500 increase in contributions will also apply to 401(k), 403(b) and 457 Plans as well as for SIMPLE IRA plans for small businesses. Obviously, everyone should be contributing the maximum amount to these tax-deferred plans or as much money as you can reasonably afford to save toward retirement.

So it seems that none of us were able to dodge some increase in our taxes this year. Given the dire straits of the government's finances, I guess we should be grateful it wasn't worse.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
0 Comments
     
News Headlines
Carrier, Wellington Record Double-Doubles in Giorgi League Win
Five-Run 10th Dooms SteepleCats in Loss to Mystic
Construction on Lanesborough's Narragansett Bridge Expected to Start
Playground Equipment Removed at Request of Williamstown Historical Museum
State Grants $600K to Improve Conte School Accountability Data
‘Party in the Park’ Returns to North Adams
Cheshire Selectmen Set Special Town Meeting Warrant
Berkshire Art Museum Kicks Off Season With 'Volume'
'Live on the Lake' Lineup Starts 16th Season on July 5
North Adams Happenings: June 28-July 4

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (234)
Independent Investor (318)
Archives:
June 2017 (7)
May 2017 (7)
April 2017 (7)
March 2017 (8)
February 2017 (8)
January 2017 (6)
December 2016 (2)
October 2016 (1)
September 2016 (9)
August 2016 (5)
July 2016 (7)
Tags:
Commodities Selloff Stocks Euro Debt Ceiling Europe Bailout Interest Rates Economy Election Wall Street Taxes Federal Reserve Jobs Banks Energy Metals Retirement Stimulus Crisis Markets Rally Debt Housing Fiscal Cliff Congress Deficit Greece Oil Recession Stock Market Currency Europe Pullback Japan
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
The Independent Investor: How Will Wall Street II Play on Main Street?
Recent Entries:
The Independent Investor: A Tale of Two Charities
@theMarket: Markets in Pullback Mode
The Independent Investor: A Tale of Two Charities
@theMarket: FOMO Fuels the Markets
The Independent Investor: The Client Comes First
@theMarket: Markets Still on a Roll
The Independent Investor: Elder Care in an Age of Confusion
@theMarket: Markets Climb Higher
The Independent Investor: Ready For a 20 Percent Correction?
@theMarket: The Trump Dump