In a made for daytime TV soap opera drama, Congress and President Obama agreed on new legislation that avoided $600 billion in tax hikes on most Americans. This does not mean that higher taxes were avoided. All workers will see smaller paychecks because Congress allowed the 2% payroll tax holiday to expire. For earners making $50,000 per year, you’ll owe $1,000 more in taxes. If you make $100,000, your taxes will go up $2,000.
Here’s a summary of the key elements of the new legislation:
· Income tax rates. If you are a family making under $450,000 per year ($400,000 for single filers) your tax rates will remain the same. If you make over that amount, your tax rate will rise from 35% to 39.6% plus an Obamacare surcharge of 3.8% for a total new tax rate of 43.4%.
· Dividends and capital gains. In addition, these top earners will see taxes on capital gains and dividends rise from 15% to 20% plus the 3.8% Obamacare surtax for a total of 23.8%.
· Death taxes. Under the new law, there are no death taxes on estates up to $5 million ($10 million for married couples) and a tax rate of 40% on estates above that amount. That’s good news for wealthy Americans who were facing a death tax exemption of only $1 million and a tax rate of 55%.
· Unemployment benefits. The new law extended unemployment benefits for twelve months.
· Itemized deduction/personal exemption. The new law sets the phase out of these tax benefits at $250,000 for single filers and $300,000 for joint filers.
Overall, this tax package appears to be a decent compromise. The $450,000 cut-off is a much more reasonable level versus the $250,000 that Obama had requested. In my experience, many families who earn $250,000 certainly do not feel rich. And keeping dividend and capital gains tax rates unchanged for taxpayers making under $450,000 will be good for retirees and Baby Boomers who depend, in part, on dividends to pay bills during retirement. The $5 million estate tax exemption with built in cost of living increases is also a reasonable level and avoids the disaster of what would have been a $1 million exemption that would have ensnared many middle class families.
What did not occur was legislation to cut our $1 trillion-plus annual deficit spending or our $16 trillion-plus national debt. To avoid automatic spending cuts, called sequestration, our lawmakers agreed to ‘postpone’ for two months what was a December 31, 2012 ‘drop-dead’ deadline. I suspect postponing drop-dead deadlines may become the norm in Washington. More disturbing was President Obama’s remarks that any discussions about cutting spending will include further tax hikes on the wealthy. Originally the President offered $3 of spending cuts for every $1 of new revenue. Now that he got higher taxes for the wealthy, it seems any spending cuts will come at a price of more taxes on some of the most productive members of our society, our business owners. This kind of leadership continues to promote uncertainty among business owners who are the primary drivers of job creation. I know these business owners. Their reaction to uncertainty is extreme caution by storing up cash versus expanding operations and asking more of existing employees versus hiring new ones. The best way to promote rapid economic growth is through creating certainty in tax policy, regulations and strategic resolutions to our deficit spending and debt. The big question is, ‘Is there anyone in Washington up to the task?’