Kentucky business, tax attorneys explain how fiscal cliff will affect you
WASHINGTON (Dec. 27, 2012) — Senate Majority Leader Harry Reid says the nation appears to be headed over the fiscal cliff, the Associated Press reports, because of a lack of progress in negotiations between the political parties.
President Barack Obama returned to Washington from Hawaii and the U.S. Senate reconvened Thursday as the fiscal cliff deadline approaches. However, the House remained on Christmas break, with members warned they could be called back on 48 hours’ notice if needed, according to CNN.
With House Republicans unable to resolve the impasse, the focus shifted to the Democratic majority in the Senate to come up with a way forward that could pass the House and get signed into law by Obama, CNN said.
When he opened the Senate session Thursday, Reid expressed doubt that enough time remained to reach an agreement, especially with the House at least 48 hours from coming back.
“The way to avoid the fiscal cliff has been right in the face of Republican leaders for days and days and days,” Reid said. He was referring to a bill the Senate previously passed that would extend current tax rates into next year for all wage earners making less than $250,000, according to CBS News.
Possible solutions, CNN reported, include a short-term deal now, setting up continued negotiations next year when Obama and a new Congress that convenes in January confront a need to raise the federal debt ceiling and approve further spending to keep the government funded. Another option is a short-term deal reached after Jan. 1 that would change the political calculus by having legislators vote for cutting the higher tax rates from the fiscal cliff, the news agency reported.
Fiscal cliff is the term used to describe a combination of fiscal changes scheduled for the end of 2012. At that time, unless Congress acts, tax increases will occur because of the expiration of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Additionally, spending reductions will occur under the Budget Control Act of 2011. These changes will cause a large predicted reduction in the budget deficit and, it is argued, a corresponding economic slowdown.
Falling off the fiscal cliff likely will impact the lives of most Americans, according to Stephen Sherman and Sarah J. Sloan, associates with the law firm Stoll Keenon Ogden. (Sherman works in the Louisville office; Sloan in the Lexington office.)
For example, for those earning $8,700 or less (single or married filing separately) or $17,400 or less (married filing jointly) in taxable income, the increase of the lowest tax bracket from 10 to 15 percent will certainly be felt, they explained. Tax brackets for higher wage earners also are set to rise.
In addition, the “patch” which protected middle-class families from paying alternative minimum tax expired last year, the attorneys said.
For the general working public, employees may notice a 2 percent decrease in their paychecks, resulting from the end of last year’s temporary Social Security payroll tax cuts. Paychecks for high-income earners also may be cut an additional 0.9 percent because of the new “Medicare” tax imposed under the Affordable Care Act. Business owners also will not be immune — certain tax breaks for businesses, such as the expiration of bonus depreciation and Section 179 expensing, will end.
The lapse of the “Bush” tax cuts would restore the so-called “marriage penalty,” causing married taxpayers to be placed in a higher tax bracket than single taxpayers earning the same amount. The current $5 million estate and gift tax exemption and 35 percent estate and gift tax rate will expire Dec. 31. Unless Congress acts, the exemption will fall to $1 million in 2013 and the estate and gift tax rate will increase to 55 percent.
To learn more about the fiscal cliff, read Sherman and Sloan’s entire explanation here.