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With a Fiscal Cliff Looming Ahead, What Do You Need to Know?

The Temporary Payroll Tax Holiday, a two percent reduction in employee Social Security tax withholding, expired Dec. 31, 2012. Beginning Jan. 2013, the average taxpayer will see as much as a $1,000 decrease in take-home pay.
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Chief Tax Officer, Jackson Hewitt Tax Service

Chief Tax Officer, Jackson Hewitt Tax Service
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WASHINGTON, DC - NOVEMBER 28: (AFP OUT) U.S. President Barack Obama (R) speaks as U.S. Secretary of State Hillary Clinton listens at a cabinet meeting at the White House on November 28, 2012 in Washington, DC. The president met yesterday with small business owners and today with the chief executives of major corporations in ongoing talks about the looming fiscal cliff. (Photo by T.J. Kirkpatrick-Pool/Getty Images)
WASHINGTON, DC - NOVEMBER 28: (AFP OUT) U.S. President Barack Obama (R) speaks as U.S. Secretary of State Hillary Clinton listens at a cabinet meeting at the White House on November 28, 2012 in Washington, DC. The president met yesterday with small business owners and today with the chief executives of major corporations in ongoing talks about the looming fiscal cliff. (Photo by T.J. Kirkpatrick-Pool/Getty Images)

The fiscal cliff is coming our way. But, what does it mean to the average American taxpayer? Let's take a look at the ways the fiscal cliff can, and will, impact you.

  1. The "Extenders", a group of short-term tax benefits that have been extended regularly for more than 20 years, expired Dec. 31, 2011. They included many tax deductions and some smaller credits such as the state and local sales tax deduction, and mortgage insurance premium deduction, the up-to $250 Educator Expense deduction for teachers, the up-to $500 energy credit for energy efficient home improvements, and the up to $4,000 tuition and fees deduction.

  • The AMT "Patch" expired Dec. 31, 2011. Up to 31 million taxpayers will be subject to either the additional tax or will see their tax credits reduced by the AMT rules.

  • The Bush-era tax cuts are due to expire on Dec. 31, 2012. Tax rates will go up beginning with a five percent increase, from 10 percent to 15 percent on the first $8,500 of taxable income. In addition to the loss of the 10 percent tax rate, the 25 percent tax rate also expires and capital gain tax rates increase.

  • Bush-era tax cuts from 2001 and 2003 are scheduled to expire. These tax cuts include reducing many credits, such as the child tax credits, the credit for child care, and the earned income credit. Additional tax cuts scheduled to expire also include the married taxpayer's standard deduction, tax rate spread, and maximum income limits for many tax benefits. The expiring credits will also limit the student loan interest deduction.

  • Temporary tax cuts from the American Recovery and Reinvestment Act (ARRA) in 2009 expired. This includes the exclusion of the debt forgiven when a main home is foreclosed forcing many taxpayers whose foreclosure won't be final until 2013, or later, to pay taxes on the forgiven mortgage debt.

  • With tax rates increasing, tax deductions being eliminated or limited, and credits dramatically reduced, taxpayers will see a much smaller refund than in the past years. The Temporary Payroll Tax Holiday, a two percent reduction in employee Social Security tax withholding, expired Dec. 31, 2012. Beginning Jan. 2013, the average taxpayer will see as much as a $1,000 decrease in take-home pay.

  • If Congress is unable to reach a decision before the end of year or into next year, income tax filing and refunds could be delayed for some taxpayers.

  • With Congress deadlocked over the federal budget, we are in danger of falling off the fiscal cliff. Lack of agreement on the budget could lead to possible layoffs of government employees. This could potentially reduce the number of employees at the IRS who ensure technology and services continue to run smoothly during tax season, as well as the number of employees available to help the public with tax questions and issues.

  • An automatic budget reduction of around 8.2 percent for each government division will lead to reduced government services, gradually impacting the work done by these departments.

  • The Health Care Act starts impacting more taxpayers with an increase to 10 percent for the medical deduction floor. Taxpayers will pay an additional .09 percent Medicare taxes on wages greater than $200,000 ($250,000 if married filing jointly) and will pay 3.8 percent additional Medicare taxes on investment earnings greater than $200,000 ($250,000) starting Jan. 1, 2013.

    • These and many other changes may impact you if we fall off the fiscal cliff in the coming days. Also keep in mind that these changes noted above are already law and are in place, so if the government does nothing to amend these laws, what I've described is what's known as the fiscal cliff. A fix, patch or new legislation is what is needed to prevent going over the cliff. It's important to understand that this is not something that impacts only the rich or the high-income wage earners. It impacts many more and very likely you.

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