The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
Dec. 17--WATERLOO, Iowa -- The "fiscal cliff" may be the most talked about and least understood catchphrase in circulation.
At its most basic, the cliff simply refers to a series of tax increases and mandatory spending cuts set to kick in come January.
After all the talk and print dedicated to the cliff, it seems most Americans have at least a basic understanding. A Pew Research Center poll this week showed 57 percent of Americans know it involves automatic spending cuts and tax increases and 70 percent know tax provisions will affect all taxpayers, not just the wealthy.
Part of the cliff was caused by the Budget Control Act of 2011, where Congress agreed to raise the debt ceiling, but put in place automatic spending cuts starting in 2013 that would result in $1.2 trillion in deficit reduction over 10 years. Those cuts were to be split evenly between defense and non-defense spending.
But other aspects of the cliff are a result of expiring of tax cuts.
Many of those tax cuts date back to George W. Bush's presidency and a host of others that have come about over time.
Here's a rundown of some aspects of the fiscal cliff that could lighten wallets if no deal is struck in Washington:
The "Bush" tax cuts: A slew of tax cuts passed Congress in 2001, 2003 and 2009 affected most everyone, with lower rates for individual income, capital gains, estate taxes and an expansion of credits and deductions. These cuts are the ones we hear most about and are at the center of the debate between President Barack Obama and Speaker of the House John Boehner. The most talked about portion, the income tax rates, make up the battlefield where Obama wants to continue the cuts for most, but allow the cuts for those earning over $250,000 to expire. If Congress does not act, all of these will expire and the nonpartisan Tax Policy Center estimated a $1,600 hit for the average taxpayer.
Payroll taxes: In 2011 a payroll tax holiday was instituted as a stimulus to get the economy rolling once again. It was renewed in 2012. This feature reduced worker contributions to Social Security from 6.2 percent to 4.2 percent. According to the non-partisan Tax Policy Center, elimination of that tax break would cost an average American $700 per year, spread out paycheck-by-paycheck throughout the year. This particular tax cut has seen little support for renewal until the past week, as prominent Republican and Democrats alike have questioned where its benefits outweigh the damage it causes to Social Security.
The Alternative Minimum Tax: This tax problem seems to get less attention than many of the others. That may be in part because it's complicated. The Alternate Minimum Tax was created under George W. Bush to ensure the wealthy don't get out of paying taxes completely, or nearly so, by using deductions and tax credits. However, the Alternate Minimum Tax was created without taking into account inflation. In the past Congress has worked around that problem by approving a "patch" that raises the limits where the tax kicks in. If no such patch is approved, the AMT would apply to nearly half of households earning $75,000 to $100,000, hitting them with an average of a $3,700 tax hike. It's estimated the AMT would affect 27 million Americans. In a September speech,outgoing IRS Commissioner Doug Shulman called the AMT the "biggest and thorniest problem" for the IRS in the coming filing season.
Tax credits and deductions known as "extenders": This package of targeted tax benefits includes some that benefit individuals and others that apply to business and industry. Among those are aimed at businesses are some that could have a substantial impact on the economy in Iowa and across the country. These provisions include the wind energy tax credits, which help support that booming industry, as well as credits that benefit other energy sectors. Already the wind industry in Iowa has seen layoffs and a slowdown because of uncertainty about the future of the tax credit. Extenders that apply to individuals include deductions for state and local sales taxes, mortgage insurance premium and adoption.
Unemployment: Those who lost jobs will see the length of time they can receive unemployment decrease. The maximum length of time a person can stay on unemployment varies from state to state, ranging from a high of 99 weeks to a low of 40 weeks. Iowa is at the low end because its unemployment rate is lower than most states. An expiration of the expanded unemployment benefits would bring most states down to a maximum of 26 weeks.
Obamacare and Medicare: A tax provision in the Patient Protection and Affordable Care Act that will kick in starting in 2013 will include an increase in payroll taxes for high earners. Individuals earning more than $200,000 or joint filers earning more than $250,000 will see nearly 1 percent more go to Medicare above those thresholds and investment income will see a larger increase above that level.
(c)2012 Waterloo-Cedar Falls Courier (Waterloo, Iowa)
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