I don’t write about politics until those rare days Washington actually does something that affects our daily lives. And after months of grandstanding and stonewalling over the “fiscal cliff”, today is one of those days.
Here’s what the recent fiscal cliff “compromise” means for your taxes:
If you are a working American, your taxes will go up immediately. The payroll tax cut is over, so rates go back up to 6.2% on the first $113,700 every employed and self-employed person earns — up from 4.2%. So if you earn a $50,000 a year, that’s an extra $1,000 in annual taxes. You will see less money in your next paycheck as a result.
For the vast majority of Americans earning $400,000 or less (single) or $450,000 as a married couple, income tax rates will stay they same. The bill permanently raises the tax rate on income earned over these amounts from 35 percent to 39.6 percent.
Dividends and capital gains tax
For taxpayers earning more than $400,000 singly or $450,000 as a married couple, the tax rate on dividends and capital gains goes up from 15 percent to 20 percent.
Tax credits, exemptions, and deductions
Certain credits and deductions added by the 2009 stimulus law (e.g. the child credit and earned income credit) are extended for five years. Single taxpayers earning over $250,000 and couples earning over $300,000 will see personal exemptions and deductions phased out.
The federal tax on the value of estates over $5 million goes up to 40 percent from 35 percent.
Alternative minimum tax
The alternative minimum tax (AMT) will be permanently indexed for inflation – a change that will prevent millions of taxpayers from being affected.
The expansion of federal unemployment insurance is extended for one year.
There are a few other provisions that temporarily delay Medicare payment cuts, automatic spending cuts, and extend the farm bill. (This last one means milk prices won’t skyrocket to $8 a gallon as had been predicted.)