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The Suburbanite
  • How 'fiscal cliff' deal affects your finances

  • The fiscal cliff deal that barely passed Congress on New Year’s Day is complicated. But it will affect nearly everyone’s finances. Here are the basics of the agreement.

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  • The fiscal cliff deal that Congress approved in a contentious New Year’s Day vote prevented a broad, massive tax increase that many believed would have stifled the economy.
    But nearly everyone in Stark County who works and isn’t enrolled in a state pension system will get smaller paychecks this year.
    Here are the basics of the complex legislation:
    • With little desire to extend a tax break intended to be a temporary stimulus, lawmakers allowed the 2 percent Social Security payroll tax cut of the past two years to expire. On Tuesday, the tax rate on the first $113,000 of annual salary returned to 6.2 percent from 4.2 percent. A household with gross wages of $50,000 a year will experience a cut in take-home pay of $1,000 for 2013 due to the expiration. Those who contribute into one of the state pension systems never got the tax break in the first place, so they’re not affected.
    • But paychecks could have shrunk a lot more without a deal. The Bush tax cuts of 2001 and 2003 were set to expire Tuesday. Then nearly everyone would have experienced a tax bracket rate increase of 3 to 5 percentage points. The Tax Policy Center estimated that this would have cost a “middle-income” taxpayer an average of $1,984 more a year. Under the deal, the lower Bush tax rates are extended permanently for everyone earning less than $400,000. Individuals earning more than $400,000 and couples earning more than $450,000 a year will see their income above those levels return to the 2000 top rate of 39.6 percent, an increase from 35 percent.
    • For these high-income earners, their tax on capital gains and dividends increases to 20 percent from 15 percent. Everyone else pays 15 percent. Without a deal, dividends would have been taxed like ordinary income.
    • Individuals earning more than $250,000 and couples earning more than $300,000 aren’t off the hook. They’ll end up paying more in taxes because they will no longer be able to fully deduct certain several deductions such as the mortgage deduction or the personal exemption. The U.S. Census estimates that roughly 2 percent of households in Stark County — about 3,000 — earn at least $200,000 a year. Individuals earning at least $200,000 and couples earning at least $250,000 will still have to pay an additional 0.9 percent tax on income above those levels and a 3.8 percent tax on investments as part of the 2010 Affordable Care Act starting this week. The money will fund health insurance subsidies.
    • If you never become wealthy, you’ll likely never have to worry about the alternative minimum tax. After years of applying temporary tax code patches, Congress permanently kept a higher income threshold before the additional tax applies.
    • The tax on estates increases to 40 percent of an estate’s value above $5 million, an increase from 35 percent. The threshold will increase with inflation. Without a deal, the new estate tax would have been 55 percent of any value of an estate above $1 million.
    Page 2 of 2 - • Tax credits that mainly benefit the poor and middle class such as the child tax credit, the earned income tax credit, the child and dependent care credit and college tuition credit would have been substantially cut without a deal. The agreement extends them for five years.
    • Hundreds of Stark County residents whose unemployment benefits expired on Dec. 29 will now continue to get those checks. Extended federal unemployment benefits will last for another year. The Ohio Department of Jobs and Family Services says 1,833 unemployed Stark residents stopped receiving benefit checks last month because they exhausted their federal benefits or because the program expired. Now the unemployed in Ohio in 2013 can continue to get up to 63 weeks of benefits. (Due to Ohio’s declining unemployment rate, the maximum by law will decline to 54 weeks for those who haven’t completed their 54 weeks by Jan. 12.)
    • For local doctors who treat Medicare patients, their reimbursement rates will stay the same under the bill, at least for a year. Without a deal, they would have plummeted 27 percent.
    • Last year’s farm bill provisions were extended for nine months, preventing a 1949 law from resulting this year in substantially higher milk prices, possibly $6 to $8 a gallon.
    • The deal postpones automatic across-the-board federal spending cuts mandated by the August 2011 debt deal for two months. It also does nothing to address the national debt limit, which U.S. treasury officials say must be raised by February to avoid a default on the nation’s debts. And Congress has to pass new appropriation bills so the federal government can spend money still after March 27.
    • The Congressional Budget Office says the deal will result in a deficit over 10 years of $4 trillion more than if all the Bush tax cuts had been allowed to expire and the alternative minimum tax was applied to a growing number of middle-class families. However, the nonprofit Committee for a Responsible Federal Budget estimates that under the deal, the deficit is $650 billion less over 10 years than if all the Bush tax cut rates and the annual alternative minimum tax patch had been extended.
    Sources: Tax Policy Center, MSNBC, The New York Times