Fiscal Cliff Changes

Yes, your taxes are going up but it could have been much worse.  The average American's household tax will go up about $25 a week but without the changes it could have been as high as $67 a week if Congress did nothing.

The biggest change is the temporary reduction in social security tax from 2011 & 2012 was not extended.  This mean the 2% cut in the payroll taxes that wage earners have enjoyed over the past two years ratchets back to its normal 6.2 level on the first $113,700 of wages or self-employment taxes.  You no doubt already discovered this in your first pay check in 2013.

The highest wage earners will pay higher taxes.  Their marginal income tax rates will rise from 35% to 39.6% on income over $400,000.  In addition their tax rate on dividends and capital gains will increase from 15% to 20% which will not make Mitt Romney happy.

The new tax bill also restores caps on itemized deductions and phase outs on those individuals making more than $250,000 ($300,000 for couples).  Mortgage deductions will be capped for individuals making more than $250,000 and couples making in excess of $300,000.

The Alternative Minimum Tax "patch" which adjusted the Alternative Minimum tax for inflation was also passed.  Previously it had to be passed each year but now it happens automatically.  This actually affects the 2012 taxes as well.

It appears that most of the items that were set to expire such as the Child Credit, Earned Income Credit, and the College Tuition Tax Credits have all been extended another 5 years to when there very well could be another fiscal cliff.

And lastly since it took Congress so long to pass these changes (mainly the Alternative Minimum Tax) it's going to take a couple of weeks for the IRS and the Tax Software people to update the changes and be able to process the 2012 tax returns particularly for those that itemize.  You early tax filers may have to wait an extra couple weeks for tax season to begin.  Also the IRS is not promising their rapid refunds in the 2 week window we have experienced the last few years.