Fiscal cliff will affect everyone, not just the rich
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Things could change at the end of the year for teachers, investors, college kids and others.
The step off that fiscal cliff Dec. 31 has implications for everyone, not just the wealthy, said Dave Sather, president and founder of Victoria's Sather Financial Group.
Across-the-board tax increases will have their place, although jumps will vary depending on what a person makes and the deductions they receive. Tax brackets and marginal tax rates will also rise, with the lowest bracket going from 10 percent to 15 percent and so on, he said.
A vanishing Social Security payroll tax reduction means a 2 percentage point increase for workers and less money in their pockets.
"Even people at the very low end are going to see far less money in the paycheck they get to take home," Sather said, noting that meant less money for groceries and gas and less spending overall.
The more than 70 tax breaks that expired at 2011's end could also hit people hard, Sather said. Those include deductions for college expenses, teachers who pay for classroom supplies out-of-pocket and state and local sales taxes.
He said the sales tax change is big for Texas, one of the few states that does not collect an income tax.
"That means that, if you bought a car this year for $30,000, there would be about $2,500 in taxes," he said. "The law now says you could deduct that from your income tax. But that will go away."
Businesses, too, will lose tax breaks including write-offs for those expanding or upgrading, tax breaks for financial companies with subsidiaries overseas and more, he said.
Those with investments are not exempt either.
Qualified dividends and long-term capital gains now see a maximum tax of 15 percent, but rates could rise to 39.6 percent, Sather said.
Estate and gift tax exemptions would drop from $5.12 million to $1 million.
Under current regulations, individuals with estates valued at more than $5.12 million pay 35 percent, he explained. In a post-fiscal cliff world, however, rates would rise to 55 percent for those with estates valued at more than $1 million.
Deductions will also take a hit, Sather said, noting the itemized variety would be phased out completely. Other credits, such as earned income credits, child tax credits and American opportunity credits would see a reduction.
Sather encouraged Congress to modify the Alternative Minimum Tax, which was last adjusted in 2010 and does not meet inflation. Although an expensive fix, without a modification, he said, the tax risked bringing massive tax increases to millions of middle-income families.
An agreement between Congress and President Barack Obama could change everything immediately, he said. As of Tuesday afternoon, however, he said things appeared headed down that predicted path.
"Absent Congress and the President doing anything, this is what will happen," he said. "It's going to be very interesting moving forward."