Unless you were hiding under a rock for the last few months, you've undoubtedly heard a lot about The Fiscal Cliff. The Fiscal Cliff referred to the sharp decline in the budget deficit that could have occurred in 2013 due to increased taxes and reduced spending as required by previously enacted laws. The Congressional Budget Office cited a mild recession and higher unemployment in 2013 as consequences of the fiscal cliff. Thanks to the American Taxpayer Relief Act of 2012 passed January 1, 2013, much of this has been averted. While there are still unresolved issues with regards to spending that will be resolved later in 2013, the biggest sigh of relief has come from a less than expected hike in taxes for many Americans.
Unless you make over $450,000 as a married couple or $400,000 as a single filer, it "seems" that you will avoid higher income and capital gains taxes in 2013. However, as the saying goes, "the devil's in the details." Three items worth noting are that even if you are under those thresholds, you could still see higher taxes in 2013.
First, the fiscal cliff did not address expiring payroll taxes, meaning that now that the payroll tax cut has expired, most Americans will be taking home less each month. Second, the fiscal cliff brought a return to Clinton-era limits on personal exemptions and itemized deductions, which will strike married filers earning more than $300,000 and single filers earning more than $250,000. Limitations on these deductions has the same effect as raising the amount of taxes you pay. Third, is that individual filers with modified adjusted gross income (MAGI) above $200,000 along with married filers with MAGI above $250,000 will now pay a new 3.8% Medicare tax on unearned income.
While the above three items are worth noting since they still impose a higher tax on those under the $400,000 and $450,000 limits, the real issue to be aware of is what I refer to as The Real Fiscal Cliff. What is it exactly? It's the foregone conclusion that no matter which hand the folks in Washington try to play, the fact is taxes will be higher... much higher in the future. Why you ask? Here are only three of the many reasons why:
Tax History - During WWII, the highest marginal rate was 94%. Throughout the entire decade of the 1970's highest tax rate was 70%. Over the past century, the average tax rate is 60%. So at 35%, which was highest marginal tax rate through December 31, 2012, you could say that tax rates are on sale.
Our Debt - It's out of control and only getting worse by the minute. Check out this video to get a picture of what over $16 Trillion in debt looks like.
Social Security and Medicare - Both of these entitlement programs alone will bankrupt our country. Former Comptroller of the United States, David Walker, in 2008 said we'd have to double tax rates immediately to avoid our country from going bankrupt. Our current standard of living is unsustainable. This video highlights the issue. Also, our taxes are on a collision course to doubling.
If you've come to the conclusion that taxes will in fact double, the question is when is that likely to happen? By my analysis of the data, 2020 appears to be critical date. By that date, both Social Security and Medicare will be unable to make their payments. Social Security is set to reach that mark in 2015, but Medicare is more significant since the problem there is five times as bad as Social Security. At that juncture, Americans could easily be paying twice (about 60% or more) in taxes than what they are paying today.
And today, a few high income earners are already experiencing 60% tax rates. Just ask golfer Phil Mickelson, who in 2013 is already fretting about the idea of having to pay 63% in taxes on his income in California. Or, you can ask the folks in France who were threatened with a 75% tax rate for top income earners. So maybe you're not a top income earner, my point is with the way our country is headed, you won't have to be a top income earner to be faced with 60% tax rates. All you'll have to do is wait until the year 2020.
Best Selling Author and Financial Strategist Ike Ikokwu gets it. For access to his best-selling book and other financial products to help you avoid the collision course with financial disaster, visit him on the web.