What Does the 'Fiscal Cliff' Mean for your Personal Tax Burden?

By on November 13, 2012 in News, Retirement

We’ve all been hearing about the “fiscal cliff” in the news lately. It’s a term that has been coined that refers to a series of tax increases set to take effect at the start of 2013.

But what exactly are those tax increases, and more importantly, what do they mean for you and your family?

The taxes set to increase and/or take effect include:

  • Expiration of the 2001 and 2003 tax cuts enacted under the Bush administration
  • A compromise on the estate tax
  • A “patch” in the Alternative Minimum Tax reducing its impact
  • Expiration of the temporary 2% payroll tax holiday
  • New taxes enacted under the Patient Protection and Affordable Care Act (a.k.a. ObamaCare)

On top of all of this, mandatory spending cuts are set to take effect under the sequester legislation, and in late February, the government is set to hit the debt ceiling. Collectively, this is what makes up the infamous “fiscal cliff.”

A recent report from the Tax Foundation illustrates what these tax increases are and what they might mean for you. The report contains a number of compelling facts and figures which help paint the whole picture.

This table from the report outlines the total tax increases set to take effect on January 1, 2013:

Tax Changes Taking Effect January 1, 2013
Tax Change Tax Increase (2013 over 2012)
Expiration of the 2001-03 tax cuts (not including estate) $156 billion
Expiration of the payroll tax holiday $125 billion
Failure to patch the Alternative Minimum Tax $88 billion
Expiration of business expensing $48 billion
Expiration of other “tax extenders” $40 billion
New PPACA (Obamacare) taxes $36 billion
Expiration of the 2009 stimulus $11 billion
Estate tax increase $10 billion
Total, Tax Increases   $514 billion
Source: Tax Foundation; Congressional Budget Office; Joint Committee on Taxation; Office of Management & Budget.

And what about income taxes? Here are a few key points noted in the Tax Foundation’s report about how income taxes will increase next year:

  • The lowest income tax bracket of 10% would expire, reverting to 15%
  • The top four income tax brackets would see rate increases as follows:
    • The 25% bracket would rise to 28%
    • The 28% bracket would rise to 31%
    • The 33% bracket would rise to 36%
    • The top bracket would rise from 35% to 39.6%

The tax on long term dividends is also set to go from a maximum of 15% to 20%, plus a new 3.8% capital gains tax on high income individuals as part of ObamaCare would also be instituted.

If you collect a regular paycheck, then you undoubtedly are aware of Social Security withholdings. Here’s how the expiration of the payroll tax holiday would impact your take home pay:

Payroll Tax Holiday Impact on Payroll Taxes
Payroll Tax Component 2010 2011 and 2012 2013 (unless changed)*
Employee Share
     Social Security 6.20% 4.20% 6.20%
     Medicare 1.45% 1.45% 1.45%
     Subtotal, Employee 7.65% 5.65% 7.65%
Employer Share
     Social Security 6.20% 6.20% 6.20%
     Medicare 1.45% 1.45% 1.45%
     Subtotal, Employer 7.65% 7.65% 7.65%
Total Payroll Tax 15.30% 13.30% 15.30%
Source: Tax Foundation*Payroll taxes for high-income earners will be higher due to PPACA (Obamacare) tax.

An example in actual numbers: if you make $50,000 per year, an increase in withholdings from 4.2% to 6.2% represents $1,000 total. That may seem insignificant but it does add up over time.

If you are at or near retirement, the collective impact of these tax increases could be especially burdensome if you no longer have the regular income you once had from working and are instead relying on other income sources, such as investments (be sure to read Carol Schmidlin’s article on the subject, Critical Tax Issues That MUST Be Addressed In 2012).

Could any of this ultimately affect the federal workforce in some way? It’s a possibility. Legislation addressing aspects of the fiscal cliff has been proposed in the past which would have an impact on federal employees (see for instance Federal Employees’ Pay Freeze Could Be Extended to Cover Payroll Tax Cut). It’s doubtful if any such legislation were to be resurrected that it would be signed into law, especially considering the president is on record as wanting to thaw the pay freeze in 2013.

Will we go over the “fiscal cliff?” That depends on the actions of Congress; as the Tax Foundation itself noted, “anything can happen.” It’s unclear at this point what actions, if any, legislators will take to avoid some of these tax increases which many people fear would harm an already fragile economy.

© 2016 Ian Smith. All rights reserved. This article may not be reproduced without express written consent from Ian Smith.

About the Author

Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce. Ian also has a background in web development and does the technical work for the FedSmith.com web site and its sibling sites.

65 Replies

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  1. guestwo says:

    And you dare to lecture about civil discourse!  One thing I love about Dems is they can dish it out but can’t take it!  Let’s face it. You have no idea on how to fix this problem. Definition of insanity is repeating the same things Owebama promised would work and expecting a different outcome. Hey I know how to pay off credit card bills. Ask Gentle Ben to divert some of that money his printing presses are churning ou viv-a-vis QE3.

  2. guestwo says:

    Let’s face it.  You have no idea on how to fix this problem.  Definition of insanity is repeating the same things Owebama promised would work and expecting a different outcome.  Hey I know how to pay off credit card bills.  Ask Gentle Ben to divert some of that money his printing presses are churning ou viv-a-vis QE3.   

  3. Garrettm1 says:

    You elected him not me.. You got what you wished for….Higher Taxes, Job Loss and a very gray future for our children.

  4. Hopeisnot_A_Plan says:

    If Canada is so great why do they not have an illegal immigrant problem like the US?

    • wombat1951 says:

      Maybe because they border the US where life is pretty good, rather than Mexico where it is not???

  5. Hopeisnot_A_Plan says:

    If the President does not compromise and allows the country to go over the cliff by continuing to demand more from the “rich” I believe that he will lose politically.  Millions of people that pay no Fed income tax now will be forced to start paying them at the pre-Bush rates.  Once they start paying taxes to help cover the debt they will likely take on a whole new attitude about the out of control spending and become more conservative.

  6. hbbear says:

    Under Clinton, we had higher taxes for high income earners and a good economy. Why do you righties despise that and Clinton so much? Because he rammed his economic policy down your throat and was right? Because he showed America what phonies ryan and Romney were? Or because he got Obama reelected? If Congress would have accepted those policies 4 years ago instead of their draconian can’t tax the job creators apporach we wouldn’t be having this discussion today. Just curious, how many jobs are created by bank accounts in the Caymens and Switzerland

  7. igahmah says:

    I suggest the stop the Earned Income Credit.  Do you know how much they could save by not giving people back thousands of dollars that they didn’t even pay in?

  8. HappilyRetiredFed says:

    Couldn’t private industry help in any way? We never hear of Time Warner donating some of their billions to the feds. Why can’t they? Why take and take from the federal workers? How about the banks? Didn’t we help them out?

  9. danl_p says:

    Eliminating the ceiling on Social Security taxes seems to make the most sense and raise significant money for Social Security. I never understood the ceiling, even back when I hit it in three months each year,

    • grannybunny says:

      You earn $110K in the first three months of the year?  Obviously, you don’t work for the government!  🙂

  10. grannybunny says:

    This whole thing is making me sick.  First, House Republicans actually considered not increasing the debt limit — to pay our lawfully-incurred debts — causing a decrease in America’s bond rating and undermining its Full Faith and Credit.  Now, Democrats are talking about allowing us to go “over the Cliff.”  All of the politicians in Congress need to rise up above their petty partisanship, become statesmen — placing the Country’s best interests first — get their acts together and start addressing the serious problems facing this Nation in meaningful, effective, ways.

    • wombat1951 says:

      Maybe the party that didn’t bother with any budgets for the last few years might finally do one?
      BTW — there are more than enough current revenues to service ALL of our current debts.   Raising the debt limit to be able to incur MORE debt is only needed to SPEND MORE.

      • grannybunny says:

        Factually, that’s incorrect; the debt limit increase was to accommodate indebtedness that had already occurred.

        • wombat1951 says:

          Factually, you are incorrect.   Currently, the Fed govt is borrowing about 41 cents of every dollar it spends.   The debt ceiling needed to be raised in order to allow the Fed govt to continue to borrow to cover all of that spending.
          There are more than enough revenues without borrowing any more to service existing debt, which currently requires about $300B of interest payments.   It is only to support the overspending on everthing else that requires the debt ceiling to be raised so that even MORE debt can be incurred.
          Ignorance of the problem is the critical element in this story.  Your post illustrates this well.

          • grannybunny says:

            You are entitled to your own opinion, but not your own facts.

          • wombat1951 says:

            Maybe you could dispute my facts with some of your own, instead of just your opinion 🙂
            First fact:  current interest payments on Fed debt is about $300B a year.   Current revenue form all sources not borrowed to Fed govt is about $2.3T a year.   More than enough revenue to cover servicing ALL current Fed debt.
            Ergo:  Debt ceiling does NOT need to be raised to service current debt as you claimed.   Debt can be completely serviced and still leave almot $2T available for other spending.
            Dispute it if you can 🙂

          • grannybunny says:

            Do you honestly think that if Congress could not agree to something as perfunctory as a routine increase in the debt limit, that they could possibly, quickly and readily, agree to the draconian spending cuts necessary to make your scenario a reality?  We can speculate all we want, but — at some point — we need to come down to Earth and deal pragmatically with the reality that confronts us.

          • wombat1951 says:

            Noted that you didn’t try to dispute my facts :)  
            You also betray your “kick the can” attitude when you call raising the debt ceiling “perfunctory”.  Perhaps 20 or 30 years ago it was……when we are in hock over $16T and growing at a rate of $1.2T per annum, agreeing to raising the credit limit to add more is not “perfunctory” — it is a serious decision to take.
            The whole mess is because one side — the Left — does not believe spending is a problem, and refuses to be serious about it.  Hence:  no budgets or tax reform or entitlement reform during the 1st 2 years of Obama’s administration.   Hence:  complete stonewalling from the Dems to include SERIOUS spending reforms as part of any total “package” to address the deficit.  Even now, all we are hearing from Obama is the demand for more taxes…..but not a peep about spending restraints.
            Pragmatism would be a PLAN that goes after more tax revenues while simultaneously going after significant spending cuts.   The next time such a PLAN comes out of the liberal-left Dem party will be the first time.   For instance — in a budget????  But then, Harry Reid hasn’t bothered with one for over 3 years, including when Pelosi ran the House and didn’t do one either.

    • sb says:

       Boo hoo. Cry me a river.

      Maybe — just maybe — Obama should put on his big boy pants…and
      finally be a leader like Reagan or Clinton?  They both had a bitterly
      divided government, but provided leadership.

      Your hero, Obama, fails. The last four years.  And the next four years.

      That’s because, as we told you, he has NO leadership experience.

      So you, that voted for him. OWN IT.  You own all of his failures, past and future.

      • PublicCitiZen says:

        You have apparently overestimated your bargaining position.

         The President has made clear that there will be no extention of the Bush/Obama tax cuts for people making over 250K.

        There will be no extention of the cuts for folks making over 250K.  And the Republicans will take the blame if they do not extend them for everyone else.

        If you look at the timing for the whole host of budget issues coming up, the Republicans are either going to compromise, or be the villain……

  11. SBIdiots says:

    For all of you idiots that did not vote or did vote for Obama.  Congratulations!!  Enjoy your new taxes!!

    • grannybunny says:

      No, actually, Congress is to blame for Sequestration, not the President.  Unfortunately, most of the Congressional incumbents were reelected.

      • GMDenver says:

        Not really…the administration broached the idea.

      • msgrowan says:

        The sequestration measure was cynically agreed to last year by both sides as a way to appear to be dealing substantively with the public’s demand for some sort of action to deal with the exploding deficit and out-of-control spending, all the while assuming that the actual spending cuts and tax increases would never really take place.   As soon as it was signed into law, the speculation began as to how soon the “draconian” cuts would be restored and the “intolerable” tax increases rescinded.  In other words, it was a set up straw man that acted as a placeholder in lieu of much more difficult measures which the pols shied away from.   Neither Congress not the President were really serious about coming to grips with the fiscal crisis with an election year then looming, and no one wanted to serve up painful medicine to a nation that has become addicted to bloated spending and an inability to recognize the medium to long term dire implications of such behavior.  The jockeying now beginning yet again is symptomatic of our jejune and feckless leadership on both sides of the political aisle on this escalating crisis.

        • grannybunny says:

          You’re correct regarding Congress, but not regarding the President, who only signed the bill because it was all Congress sent him.  Obviously, he had hopes for the Supercommittee, but when Congressman Ryan was able to influence some of his fellow Committee members to vote against their own report, those hopes were dashed.

          • msgrowan says:

            Oh come now.  The President was in close touch with his congressional allies throughout the process, despite a “tsk, tsk” pose and trying to portray himself as “above the fray,” and is equally complicit in the charade that played out.  As you should be aware, Ryan advised voting against the report because it wasn’t a serious proposition, as it ignored the true core issue of the urgent necessity dealing with the entitlement programs that are steadily eroding our economic well-being.  Both parties have sought to squeeze maximum political advantage from all this – given that it played out in the intense environment of a looming presidential election campaign – always a very poor time to seek true, effective, and necessarily painful reforms from our political “leaders” of both political persuasions.

          • grannybunny says:

            You’re giving Ryan a pass that he doesn’t deserve, while at the same time attempting to impose strict liability on the President for everything that Congress does.

          • msgrowan says:

            I’m merely stating the facts of the matter.  There’s no way that the congressional Democrats would have supported passing legislation that the President would not have agreed to sign in advance; indeed, numerous instances of congressional-White House liaison and consultation over the evolving contents of the bill were reported at the time.   The report that Ryan urged voting against indeed ignored the root cause of our escalating and nonsustainable spending syndrome as our entitlement programs, which issue if not addresssed makes any other measures palliatives at best.  I stress again the culpability of both parties in this imbroglio.  To attempt to shift blame from one to the other one-sidedly makes light of that key reality.  We need to hold both parties accountable for their joint deceptive actions, as each puts jockeying for short-term political advantage ahead of the national welfare.

          • grannybunny says:

            That’s the entire point of my comments:  that everyone needs to be more even-handed, and quit playing the partisan political games, mouthing these partisan talking points, etc.

          • msgrowan says:

            Let’s celebrate our joint agreement – a pox on both political sides when they do not address issues squarely that involve the national welfare, and engage instead in deliberate, self-interested diversionary tactics that only put off necessary though painful reforms.

          • AFGEpres says:

              Your grasp of “facts” without resorting to whining or assigning blame is the reason I always consider your opinion. While I may not always agree 100% with your opinion, I do believe in your right to express it. The difference between youself and some that are compelled with sharing their innermost thoughts is at least you take the time to organize those thoughts.
               As I have said before, we have a process. The process, though dissapointing to many at times, does work as intended. Regardless of whether there is an “R” or a “D” after you name, we can continue the great American Tradition of conquering adversity. If we choose to.

          • msgrowan says:

            The essence of civil discourse is that it be … civil.  We get precisely nowhere by the all too typical ad hominem name calling and infantile “whining or assigning blame,” as you so accurately put it, that passes for reasoned debate with all too  manyzealots on both sides.  We can disagree on policy grounds and yet maintain personal respect for the deeply held and reasoned views of intellectual opponents.  We join in our love and admiration for this great nation (“warts and all,” as Cromwell put it so well in another context) and therefore advocate policies we believe can be the cure “for what ails us.”  At the same time, humility is needed to question, as Franklin put it our own “infallible judgment,” and recognize the worth and validity of opposing viewpoints.  We’re all involved in the great and ever-ongoing American “experiment,” still “testing whether this nation or any nation so conceived and dedicated [to freedom] can long endure.”  Lincoln had it right in 1863 at Gettysburg, and his words still resonate strongly today.  With that, I now step down from my soap box.

          • AFGEpres says:

            I am able to only wholeheartedly concur with your sentiment.

          • sb says:

             “…the President, who only signed the bill because it was all Congress sent him”

            Boo hoo. Cry me a river.

            Maybe — just maybe — Obama should put on his big boy pants…and finally be a leader like Reagan or Clinton?  They both had a bitterly divided government, but provided leadership.

            Your hero, Obama, fails. The last four years.  And the next four years.

            That’s because, as we told you, he has NO leadership experience.

            So you, that voted for him. OWN IT.  You own all of his failures, past and future.

          • Sweetpindc says:

            I hate to remind you that you own them too. He’s also your president. Welcome to democracy.

          • Hopeisnot_A_Plan says:

            Obviously we do not need a President to provide some leadership.  All we need is an autopen to sign those bills. Teflon Obama sheds blame like a duck sheds water.

        • Ross200 says:

          Msgowan, I disagree with you on this sequestration issue. The President and the Democrats outsmarted the Republicans on this one.  The President is holding the cards, and there is not much that the Republicans can do. I wouldn’t mind if sequestration takes place. I want to see the defense cuts implemented.  President Obama has gotten back his mojo. 

          • msgrowan says:

            Well, we’ll have to agree to disagree on any outsmarting that supposedly occurred; both parties essentially punted, intending  that the “draconian” spending cuts and “intolerable tax increases with the expiration of the Bush tax cuts, together with the ending of the “temporary” FICA tax cut (which is looking more and more like a permanent fixture, which just means digging the Social Security fiscal all the deeper more quickly) were just shams that they would finesse on a post-election basis – showing once again their contempt for the electorate’s average level of intelligence.  Even as the bill was passed and sent to the President, both sides were assuring their supporters that they would see that its measures would never take effect.  Personally, I’m of the belief that we need some serious and necessarily painful shock in the form of the proposed sequestration and tax increases to reverse the ever growing spending and borrowing  trends.  If we’re ever to begin again getting a handle on our unstable fiscal condition, it’s best to begin sooner rather than later, but I strongly doubt that that will happen.  If the President – having gotten back as you surmise his supposed “mojo”  – plays his intransigence card again (which backfired badly and caused  the collapse of the even earlier budget deal painfully worked out by congressional negotiators) thinking he can bluff Boehner this time, and Boehner again refuses to be intimidated, there is a slight chance that the “fiscal cliff” scenario might just play out.  If so, I for one would not find that an unmitigated disaster, but rather a recognition that we cannot forever continue down the road to fiscal oblivion as we’e been going over the last decade in particular.

          • Ross200 says:

            I think that we are in for some interesting times over the next couple of months and then next year when a larger universal deal will be made.  I generally support a budget deal that is 50% new revenues and 50% cuts. I like a balanced approach.  I also think that there should be some sacrifice on the part of Federal Employees and Federal Retirees. I think that a small reduction in the COLA is appropriate.  For Federal Employees, I think that the pay freeze should continue until the end of this fiscal year.  Also, there should be an increase in the FERS and CSRS Employee Contribution Rate of approximately 1.6% phased in over a number of years.   

          • msgrowan says:

            You propose a commendable balanced approach, and, with some inevitable tweaking, it could well be the outcome of all the current scrimmaging and hullabaloo going on, as it imposes appropriate but necessary pain pretty much across the board, although I’d include entitlement reform also in the mix (or at least in a more distant “universal deal”  to generalize the pain even more, but still appropriately).  We could – and may well – do a lot worse.    Thanks for a reasonable proposal.

          • Rongordon says:

             Very good msgrowan, I am beginning to like your comments.  You are indeed an intelligent person and quite knowledgeable even though I may have to buy a new dictionary to keep up with you. 

          • msgrowan says:

            Stick with Webster’s Third New International; it can’t be beaten by any of its newer competitors aspiring futilely to dethrone it. 

        • Rongordon says:

           Sorry, cannot comment on your reply to grannybunny, just too busy looking in my dictionary and thesaurus to find feckless, Draconian, jejune and sequestration.  Oh, I think sequestration is what happens to a jury when they are not allowed to go home. 

    • Lrr60681 says:

      Instead of playing the blame game, every American citizen needs to “man-up”.   I don’t see the American people demanding that Congress act responsibly.  Congress had made a fool of us all.  They fiddle while the country burns.
      Clint Eastwood said one thing right:  Congress works for us.  We pay their salaries and benefits.   Somehow, things got turned around.   Americans need to wake up and smell the coffee.  Congress can only do what we allow them do.  If you don’t want to share the responsibility then just sit there and make derisive comments on blogs.  If you want change, BE THE CHANGE AGENT.

  12. carolschmidlin says:

    Nicely done!

  13. D Byte says:

    285 Fortune 500 companies have $1.5 trillion in unrepatriated profits held in offshore accounts.  Our Congress seems unable to act or prevent this from happening.  Result – $500 billion less taxes.  Source, CTJ.org

  14. Fed_Peasant says:

    The modification of tax code for the home mortgage & municipal bonds will create the most upheaval & protest.

    • Rainy098 says:

      The home mortgage interest change could lower home values and trigger another housing glut.  It may also impact more middle class.

    • grannybunny says:

      Actually, the fiscal cliff has nothing to do with modification of the home mortgage deduction, and the President opposes eliminating it.