The “fiscal cliff” that you keep hearing about refers to the tax increases and automatic spending cuts scheduled to go into effect in January 2013. If Congress does nothing to keep these spending cuts and tax increases from going into effect, economists predict serious damage to our economy – hence the going-over-a-cliff metaphor. The scheduled changes include the end of the Bush era tax cuts, automatic spending cuts resulting from Congressional failure to reach agreement on cuts, and new taxes that help to pay for the Affordable Care Act.
If the fiscal cliff tax raises are implemented, the tax rates on income tax, payroll tax, capital gains and estate tax, among others, will all be going up. If Congress does nothing to prevent these raises from taking effect, the top tax rate on ordinary income will go up to 39.6 percent, from the current 35 percent, and capital gains will go up to 23.8 percent, from the current 15 percent. On average, taxpayers will pay 5% more in taxes, but the top 1 percent of households will have the largest tax increases. It is estimated that a typical middle-income household (annual income of $40,000 -$60,000 a year) will see a tax increase of about $2,000.
Are you Prepared for Fiscal Changes in 2013?
As an estate planning lawyer, much of my work involves planning to help people minimize the taxes that their estates will pay. My main concern is how any change in the estate tax will affect my clients and my work. Currently each individual has an exemption equivalent of $5 million per person, so a married couple can shelter a total of $10 million from federal estate taxes. Amounts over the exemption are taxed at 35%.
If the fiscal cliff changes take effect, individuals who die on January 1, 2013 and later will have an exemption equivalent of only $1 million to shelter their assets from tax. The tax rate on amounts over $1 million will be 55%. If you have enough to be concerned about estate taxes, you may want to consult with your advisors about steps that you can take now to protect the wealth that you have accumulated from higher tax rates that are almost a certainty for the future.