As the dust settles on the long impending issues surrounding the ‘fiscal cliff’, taxpayers and top-earners can now breathe a sigh of relief. On Jan 02, 2012, the US Congress had struck a deal with the members of House to pass the bill and legislation. The situation encircling the voting and passing of legislation was closely watched by thousands of taxpayers and economists, because if the deal had collapsed, most Americans would have been hit by tax hikes and spending cuts that would have stalled the fragile economic recovery. Now that the bill is passed, let’s analyze how the fiscal cliff could impact personal finances.
What is ‘Fiscal Cliff’?
The fiscal cliff is defined as the decline in the deficit as a result of reduced spending and increased taxes in the US. In early 2013, the deficit was projected to be halved due to the difference in the revenue received by the US government and the actual government spends. Economists predict that the decline in the deficit could lead to a modest recession in the first half of 2013, followed by moderate growth in the second half of 2013. To curb the implications of the fiscal cliff, the US Congress accepted the passage of American Taxpayer Relief Act (ATRA).
The big winners of the newly passed legislation are the top earners who make more than a million dollars every year. If things had gone by Obama's earlier plans, taxpayers making more than $1 million would have had to shell out around $180,000 on taxes annually. But as per the new deal, taxpayers on average can save up to $60,000, as they will be required to pay about 6% of their income as taxes. The after-tax income of top-earners will be reduced, but not to the extent that was initially anticipated. The tax increases proposed under the new deal is about 50% lower than Obama’s initial tax hike plans. Furthermore, for those who make money through investments, those who come under $250,000 - $400,000 earnings bracket and those who earn money from dividends, were all spared from any new tax hikes.
For individuals making more than $450,000, the tax rate would go up from 35% previously to 39.6%. The same income group will have to pay about 20% taxes on all capital gains, which is a 5% increase from the previous rate. Estate taxes also received a minor shake up. Estates worth more than $5 million will need to pay about 40% in taxes. Federal workers from Defense, Agriculture, and NASA were all bracing for furloughs as part of the spending cuts initially planned, but they were rendered with two months of respite as result of the new bill. Certain economists predict that federal workers could still face furloughs later in the year. Federal workers were set to receive wage increases in late March, but there is no information on how the fiscal cliff will impact the proposed pay hikes.
The bottom line is that these tax hikes may not hold on for long, as the Democrats and Republicans are pushing the government for even higher tax hikes in order to generate more revenue and cut the deficit.
This guest post is brought to you by Nicole Wilson of www.cabletimenyc.com, a site that offers savings and current information on time warner cable.
I'm Louida from Atlanta, Georgia and I'm a mother of two daughters, blogger, and full time working mom at a Business Consulting Firm.
I love helping others learn how to start working from home on the internet free to supplement their current income.
I also blog at Productreviewmom.com
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