Ask Stacy: Are My Taxes About to Go Up?


What's Hot


2 Types of Black Marks Might Vanish From Your Credit File SoonBorrow

6 Ways the Obamacare Overhaul Might Impact Your WalletInsurance

7 Dumb and Costly Moves Homebuyers MakeBorrow

This Free Software Brings Old Laptops Back to LifeMore

Obamacare Replacement Plan Gets ‘F’ Rating from Consumer ReportsFamily

Beware These 12 Common Money MistakesCredit & Debt

21 Restaurants Offering Free Food Right NowSaving Money

17 Ways to Have More Fun for Less MoneySave

House Hunters: Beware of These 6 Mortgage MistakesBorrow

30 Household Uses for Baby OilSave

25 Ways to Spend Less on FoodMore

Nearly Half of Heart-Related Deaths Linked to These 10 Foods and IngredientsFamily

5 Surprising Benefits of Exercising Outdoors in WinterFamily

10 Ways to Save When You’re Making Minimum WageSave

Boost Your Credit Score Fast With These 7 MovesCredit & Debt

7 Painless Ways to Pay Off Your Mortgage Years EarlierBorrow

The Most Sinful City in the U.S. Is … (Hint: It’s Not Vegas)Family

The True Cost of Bad CreditCredit & Debt

10 Companies With the Best 401(k) PlansGrow

This Scam Now Tops ID Theft as the No. 2 Consumer ComplaintFamily

6 Stores With Awesome Reward ProgramsFamily

6 Ways to Save More at Lowe’s and The Home DepotSave

6 Healthful Treats for Your DogFamily

New Study Ranks the Best States in the U.S.Family

Thousands of Millionaires Moving to 1 Country — and Leaving AnotherGrow

Strapped for College Costs? How to Get the Most From FAFSABorrow

6 Overlooked Ways to Save at Chick-fil-AFamily

Ask Stacy: What’s the Fastest Way to Pay Off My Mortgage?Borrow

Where to Sell Your Stuff for Top DollarAround The House

8 Ways to Get a Good Price on a Shiny New AutoCars

Ask Stacy: How Do I Start Over?Credit & Debt

Secret Cell Plans: Savings Verizon, AT&T, T-Mobile and Sprint Don’t Want You to Know AboutFamily

30 Awesome Things to Do in RetirementCollege

14 Super Smart Ways to Save on TravelSave

The Rich Prefer Modest Cars — Should You Join Them?Cars

You’ll Soon Pay More to Shop at CostcoSave

10 Ways to Save When Your Teen Starts DrivingFamily

An Obama victory means higher taxes. Or does it?

Here’s a recent email from a reader. Maybe you can relate…

Dear Stacy,
I’m a longtime reader and love your site!
I was crushed on election night to see Romney lose the election, mainly because he was going to lower taxes, while “comrade Obama’s” plan is to raise them. What can we do to plan for more government taxing and spending?
– Dick

Here’s your answer, Dick…

My first piece of advice is to take some of the time you’re now apparently devoting to Rush Limbaugh and the like and invest it into actual journalism. Whether you like him or not, our president isn’t a communist. Whoever convinced you otherwise is simply fomenting fear to line their own pockets. Don’t fall for it.

But your question about taxes is a good one. Before we dig into the details, however, let’s be clear: Tax talk has to be divided into two distinct categories. The first is about the “fiscal cliff.” The second concerns tax changes that could occur once it’s behind us.

Will we go over the fiscal cliff?

The fiscal cliff has nothing to do with the re-election of President Obama – it’s been on the horizon for months now. And if you’re not concerned about it, you should be. I wrote about it several weeks ago in a post called Ask Stacy: Are We Heading Toward a Fiscal Cliff?, but here’s another look at the highlights…

What it is: Without congressional action, a combined $600 billion of spending cuts and tax hikes will automatically occur on Jan. 1, 2013. If that happens, the result will be an economy tumbling off what’s become known as the “fiscal cliff.” But that’s just cute wording for “recession.” Because that’s most likely what will happen if Uncle Sam simultaneously slashes spending and raises taxes in an already weak economy.

This problem is self-inflicted, completely predictable, and entirely preventable. The reason it’s even a remote possibility is that Congress, by refusing to reach a timely compromise on the debt ceiling last summer, has already proven it’s willing to put principle over the good of the country.

To avoid the fiscal cliff, Congress and the President have to reach a compromise. Democrats and the President would like to raise income taxes on high-income Americans to reduce the deficit, but preserve today’s low tax rates for everyone else. The Republicans are loathe to see taxes increase for anyone, including the wealthy, because they claim that burdening “job creators” will hurt the economy.

Tax hikes: Check out my original article for a detailed list of the tax increases that will occur if no compromise is reached. But suffice it to say that nearly everyone who pays income taxes in the United States will pay more if we go off the cliff. How much depends on who you choose to believe: According to this Wikipedia page, the Tax Policy Center says taxes will rise by an average of $3,701 per household, while the Heritage Foundation says households would pay $4,138 more.

Spending cuts: While Social Security and Medicare were specifically excluded from the chopping block, nearly every other form of government spending could be subject to cuts that will total $110 billion per year: $55 billion to defense, and $55 billion to non-defense spending.

While it sounds like spending cuts are a good idea, the problem is that automatically slashing government spending would be a shock to an already weak economy. It could also reduce defense preparedness and cut programs critical to helping those in need.

Bottom line? The fiscal cliff is serious. But because this is true, it’s likely to be resolved before Congress drives us over it, even if that resolution turns out to be nothing more than postponing existing deadlines by a few months.

Your taxes after the fiscal cliff

If the issues surrounding the fiscal cliff aren’t resolved, as I said above, everyone’s taxes will go up: something that would have happened regardless of who won the election. And if the issue is successfully resolved, it’s possible the compromise will include higher taxes on single taxpayers earning more than $200,000 per year or couples earning more than $250,000.

It is highly unlikely, however, that anyone else would be immediately affected.

But what will happen after we pull back from the precipice? Should every taxpayer be concerned about higher income taxes under Obama?

Fiscal cliff or not, Democrats want the wealthiest Americans to pay more income taxes and Republicans don’t. However, since the balance of power in Washington remains unchanged – same guy in the White House, same Republican House majority, same Democrat Senate majority – making major changes will prove difficult for either party.

That being said, it’s likely the wealthiest Americans will eventually end up paying higher taxes on both income and investment profits (capital gains).  It’s also likely that the payroll tax cut all Americans have enjoyed for the past two years will be allowed to expire, which means instead of paying today’s 4.2 percent into Social Security, you’ll be back to paying the traditional 6.2 percent.

But other than that change, married couples earning less than $250,000 probably won’t have a lot to worry about, tax-wise. At least for now.

Stacy Johnson

It's not the usual blah, blah, blah

I know... every site you visit wants you to subscribe to their newsletter. But our news and advice is actually worth reading! For 25 years, I've been making people richer without making their eyes glaze over. You'll be glad you did. I guarantee it!

💰🗣📰

Read Next: 8 Great Travel Freebies You Can Get in 2017

Check Out Our Hottest Deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 2,020 more deals!