Ask Stacy: Are My Taxes About to Go Up?

Photo (cc) by 401(K) 2013

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.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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