How would going over the fiscal cliff affect you?
A 'fiscal cliff calculator' helps you figure it out
Thursday, December 6, 2012
After every government official and politician appearing on the Sunday talk shows agreed Republicans and Democrats are hopelessly deadlocked on any effort to avert the so-called fiscal cliff, it hardly created a ripple on Wall Street Monday.
Either the market has priced in the effects of across-the-board tax increases and spending cuts or concluded it doesn't matter nearly as much as a breathless media has made it out. It's useful to remember that the term “fiscal cliff” was coined by Federal Reserve Chairman Ben Bernanke, who believes the combination of tax hikes and spending cuts would deal a severe blow to four years of Fed monetary policy.
Fiscal cliff calculator
But how, exactly, would it affect you? The folks at CreditCards.com have devised a fiscal cliff calculator they say will tell you. Users of the calculator type in their income, then select their exemptions and filing status. The calculator computes their combined federal income and Social Security taxes under current rates, and the larger, "post-cliff" tax bill using rates scheduled to go into effect Jan. 1.
"We wanted to give people a tool that would help them cut through the complexity of the tax changes," Editor-in-Chief Daniel P. Ray said.
To try it out, we selected a family of four with a combined household taxable income of $72,000. The couple files jointly and under current law pays $8,809 in federal taxes. Once tax rates revert to their pre-2002 levels, they would pay $11,432.
Assuming they receive 26 paychecks per year and 100 percent of their taxes are covered by withholding, their paychecks would decline by almost exactly $100.
Let's look at another example – a single person just out of college earning $18,000 working in a retail job. Currently they pay $1,566 a year but after going over the cliff their tax bill would be $2,331. Again, assuming 26 paychecks per year, that's $29.42 less per paycheck.
Now let's look at an upper income couple with no children, with a taxable income of $262,000. Under the current law they pay $62,360 but that increases to $72,992 after the cliff. That works out to $10,632 more – a $408 drop in take-home pay.
While people at the higher end of the income scale will face the biggest tax hikes under the fiscal cliff scenario in dollar terms, many lower-income earners will see larger percentage increases.
There are some among both the Republican and Democrat camps that have suggested it might not be so bad to go over the cliff. Last week former Democratic National Committee Chairman Howard Dean said the fiscal cliff presented liberals with the best deal they could ever expect – a return to the Clinton era tax rates and steep cuts in Pentagon spending, which he said Republicans would never agree to if it were brought to a vote.