How much will your taxes go up if US falls off 'fiscal cliff'? (+video)
Congress has put off dealing with the fiscal cliff – a huge suite of legislation – until after the Nov. 6 election. If it doesn't do something by Dec. 31, taxes will go up on virtually everyone.
How bad will your tax bite be next year?Skip to next paragraph
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Bad, real bad, if Congress and the White House can’t reach a compromise on the "fiscal cliff" – the enormous suite of fiscal laws that are set to expire or take effect at the end of the year, and that include the expiration of Bush-era tax cuts as well as other tax credits.
The scale of that fiscal cliff – what will happen to the tax bills of 158 million households – is now coming into closer focus. And the view is daunting for just about everyone who collects a paycheck, deposits dividends, or gets a tax credit of some sort.
On Monday, the nonpartisan Tax Policy Center issued a report that finds that Americans will pay an additional $536 billion in taxes next year if there is no compromise. That works out, on average, to about $3,500 per household.
“That frankly is a lot of money,” said Donald Marron, the director of the TPC, which is a joint venture between the Urban Institute and the Brookings Institution.
According to the report – introduced at a press conference on Monday – almost no one will be spared. About 88 percent of all households will see their taxes rise. Middle-income households will see an average increase of about $2,000. Low-income households will see an average increase of $412, and upper-income people will pay an additional $14,173 on average.
Among the reasons:
- Congress has also not renewed a “patch” that amends the alternative minimum tax (AMT). Without it, some 20 million more Americans will be forced to pay the tax on their 2012 tax returns to be filed on April 15.
- The estate tax will hit more than 10 times more estates than in 2012.
- The expiration of a variety of tax cuts, including the Bush-era tax cuts and some that were part of the Obama stimulus, means almost everyone’s income-tax rate will rise, on average, by 20 percent. The average federal income-tax rate for everyone, including corporations, will rise from 19 percent to 24 percent.
- Higher payroll taxes for Social Security and Medicare will kick in.
The payroll taxes will take effect in “the first paycheck,” says Roberton Williams, a senior fellow at the TPC in an interview. “Roughly 2 percent more will be taken out.”
Congress and the White House had agreed to extend the temporary cut in Social Security taxes only through the end of this year in an effort to give the economy a boost. Neither party has shown an inclination to renew those cuts in part because it takes money away from the Social Security trust fund and increases the budget deficit.
Taxpayers will also notice that their employer is likely to receive a new schedule of withholding from the government. This will increase the amount of money automatically withheld.
This reflects the expiration of the various tax cuts.
Looking at taxes paid on cash income, here’s how the TPC estimates the looming deadline could affect you: