What The Fiscal Cliff Deal Means For Your Taxes

A month ago, all everyone was hearing about was this darn fiscal cliff. Are we gonna go off the cliff? Are taxes going up? Going down? What exactly is Congress doing up there on that hill? Is the world going to end as we know it?!

Phew, it was quite a confusing and stressful time! The good news is that we have not gone over the fiscal cliff – thanks to a last-minute deal that Congress pulled off.

But what does that even mean? Here’s a breakdown in simple terms to help you out:

Increased Payroll Taxes

You may have already noticed that your paychecks are a little bit lighter this year. That’s because of an increase in wages-earned (or payroll) taxes.

The deal that Congress passed to avoid going over the fiscal cliff increased everyone’s Social Security taxes from 4.2 to 6.2 percent. That doesn’t sound so good, but what you might not know is that if Congress hadn’t passed a deal and we did go over the fiscal cliff, our payroll taxes would have gone up more than the 2 percent on Social Security taxes. Here’s a handy calculator from The Washington Post that shows the difference between the two scenarios.

Okay, so you know your payroll taxes are going up, but what exactly does that mean to your monthly income?

The average American family earns $50,000 per year, according to CBS news. That means their taxes will increase by $1,000 per year, or around $83 a month.

If your family earns more — like $100,00 per year — you’ll be paying an extra $2,000 per year, or an extra $165 per month – roughly.

Wealthy Tax Payers

Some wealthy tax payers – those who earn $400,000 or more – will see their tax rate increase from 35 percent to 39.6 percent. The capital gains tax rate will increase from 15 percent to 20 percent for those wealthy taxpayers, too.

Tax Credits Extended

Although the middle class will be hit by those increased payroll taxes, as mentioned above, they may see some relief in the extension of some important tax credits.

These credits specifically benefit low and middle class taxpayers. Some of the credits include Child Tax Credit, Child and Dependent Care Credit, The American Opportunity Tax Credit, the Earned Income Tax Credit.


If you’re a government worker or married to a government worker (or supported by a government worker!), you know that many federal employees are on pins and needles right now, wondering if they’ll have a job for the rest of the year.

The sequestration – which is a large amount of federal budget cuts – is an attempt to take control over our exploding deficit. Congress was supposed to make a decision on whether to sign off on $1.2 billion in cuts over the next 10 years (50 percent of domestic spending and 50 percent of defense spending) on January 2nd, but pushed the decision back to March 1st.

Many government agencies are determining their own budgets based on the cuts, and federal employees may very well be affected by those cuts. Furloughs are a popular term right now. Cutting salaries and expense through attrition (e.g. not replacing an employee when they retire) is another idea.

It’s clear that our country needs massive budget cuts and, right now, that’s all in Congress’ hands. Come March 1st, we will have a better idea just how these cuts affect our country and the federal workforce.

2012 Tax Returns

With the 2012 tax season ramping up, many people are wondering how this situation will affect their tax returns. Due to the changes, there was a delay in when you could begin filing returns, but the IRS is now open for business. The good news is that, for this tax season, it’s business as usual. All the new rules and tax cuts are taking effect for 2013. If anything, there could be a delay in receiving your refund, but, as of now, that’s the only change to this year’s tax returns. So, rest assured that you can fire up your tax software and still file your tax returns as you always would this spring.

Do you have questions about how your tax situation will change as a result of the fiscal cliff deal?

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About Amber Gilstrap

Amber is a twenty-something CPA from Kansas City, Missouri who loves writing, working out, and---of course---finding fresh ideas for saving money. Follow her on twitter @amberinks.


  1. One important distinction: SS taxes didn’t technically increase. A temporary reduction of the required contribution (I think it was part of the stimulus in 2011) expired at the end of 2012 and was not extended by Congress.

  2. Also note that higher income taxpayers must also start paying a 3.8% additional tax on net investment income to the extent certain threshold amounts of income are exceeded ($200k for single filers, $250k for joint returns, etc). Therefore, taxpayers within the NII surtax range must pay the additional 3.8% on capital gain, whether long term or short term. Thus the effective top rate for net capital gains is 23.8% for LTCG and 43.4% for STCG.