What’s Happening to My Taxes? The Fiscal Cliff Compromise in 60 Seconds

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:

Payroll tax

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.

Income tax

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.

Estate tax

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.

Unemployment benefits

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.)

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


  1. That additional payroll tax will put a dent in the ol’ budget.

  2. Katherine says:

    I actually got a paycheck today. I saw an increase in my social security tax of $10.95. I’m 23, and the word in the office (ages 35-90) is that I’ll never get SS benefits for retirement. I would feel better about that if my parents were retired and I knew (or could fool myself into thinking) that it was benefiting them. My 87 year old grandmother still works.

    • I’ve been back and forth on this issue. I’ve come to the conclusion that I will get some of my SS money back when I retire. The basis for this conclusion is that no member of congress would want to be a member of the congress that votes to get rid of SS benefits. You won’t get all that you put in, but I think you’ll still get something in retirement. This opinion is probably worth what you paid for it though.

    • I am conservative when it comes to saving for retirement, and the figure I use is the one the SS department puts in my SS annual statement: right on the front they state that unless more money is raised they will have enough to pay me 78% of my benefit when I retire ~2040. I agree with Tom that no Congress will vote to get rid of benefits. Truthfully I doubt they will go into giving people 78% or other less than 100% of their benefits. What they will do though is continually tie the annual SS inflation to the lowest possible index, thereby having the net effect of giving future retirees a less than 100% benefit, but without calling it that. Plus, congress will have to change some things, like taxing income over $113,700, etc if they want to keep the SS program supporting a growing number of seniors off of a relatively more limited working population.

  3. Our Canadian payroll taxes just went up slightly but so did the taxes on the highest income earners. The government just sort of snuck the changes in without the American hoopla. Most people probably won’t even notice the small changes. I am lower income so there will be no changes for me.

    I did follow the cliff discussions but I don’t understand it all. It seemed like your biggest problem but now it seems like this debt ceiling is an even bigger problem. Debt is bad for everyone but a shaky American enonomy is terrible for Canadians and your politicians can’t seem to agree on anything. Very confusing on the outside looking in at a very different political process. Most of the debate seems to happen on television and no real debates or discussion happen on the floor of your two legislative bodies.