If I had a post, I would link it, but I found this extremely useful summary (prepared by CPA Kay Parker) in an email from HBU. In honesty, I have to say that I think it might be good from a public policy standpoint for these changes to take effect. I think we would experience significant deficit reduction and would broaden the tax base (which is pretty much always good if rates aren’t too high). See below.
What is the “fiscal cliff”?
It is a combination of up to $600 billion of expiring tax cuts, new taxes and automatic spending cuts you can expect unless Congress acts to extend or revise.
Expiring Tax Cuts
The 2001 Bush-era tax cuts that were extended during the Obama Administration are set to sunset at the end of 2012.
- The current 10, 15, 25, 28, 33 and 35 percent tax rate structure will be replaced by 15, 28, 31, 36 and 39.6 percent.
- The current 15% tax rate (0% for those in the 10/15% tax brackets) for qualified long-term capital gains reverts to 20% (10% for those in the 15% tax bracket). Certain five-year property will be taxed at 18% (8% for those in the 15% tax bracket).
- Qualified dividends will again be taxed at ordinary tax rates, instead of at the more favorable capital gain rate.
- The personal exemption/itemized deduction phase outs for higher income taxpayers will return.
- The current estate and gift tax, set at a maximum rate of 35% with a $5.12 million exemption amount, will revert to 55% with a $1 million exemption amount.
There are a number of extenders set to expire at the end of this year. For example:
- Payroll tax holiday
- State and local sales tax deduction
- Marriage penalty relief
Certain taxpayers will see a 3.8% Medicare surtax on net investment income, and high-income wage earners will incur an additional 0.9% Medicare tax.
Automatic spending cuts agreed to as part of the debt ceiling deal of 2011 will begin to go into effect on Jan. 1, 2013.
UPDATE: I should add, though, that I think the estate tax is fundamentally wrong. I do not support a higher rate there. The money in an estate has all been taxed. There is no need to tax it again.