Fiscal Cliff Highlights

Payroll taxes increased for wage earners

There’s no tax relief for anybody in the fiscal cliff tax deal. For wage earners, your Social Security (FICA) tax withholdings will be deducted at 6.2 percent for the first $113,700 of earnings. This is a 2 percent increase from the 4.2 percent deduction that has been the withholding rate for the past two years. Unlike some of the other changes that won’t be felt until the 2013 tax season, this change will have an immediate impact on your next paycheck.

Income taxes increased only for the wealthy

Income tax rates will remain the same for individuals with annual income of less than $400,000, or $450,000 for those filing married joint returns. The income tax rate for those wealthy taxpayers will increase from 35 percent to 39.6 percent.

Investment taxes increased only for the wealthy

Capital gains and dividend tax rates will remain the same for those individuals earning less than $400,000, or $450,000 for married joint filers. The capital gains and dividend tax rates for the wealthy will increase from 15 percent to 20 percent.

Income tax deductions and exemptions limited for the wealthy

Individuals with annual income of at least $250,000, and those married filing jointly earning at least $300,000, will be limited on the personal exemptions and itemized deductions they can claim. Taxpayers with incomes above $422,500 will not qualify for a personal exemption. This is a throw-back to the limits on deductions and credits for the wealthy that were in force prior to the Bush era tax cuts, and that were eliminated in 2010.

Important tax credits extended

Tax credits created by American Recovery and Reinvestment Act of 2009 are extended for five years. These include the Earned Income Tax Credit, Child Tax Credit, and the American Opportunity Tax Credit.

Debt Forgiveness Extended

Homeowners that weren’t able to complete their debt negotiations or procedures before December 31, 2012, were granted a reprieve. Forgiven mortgage debt will continue to not be treated as taxable income for an additional year.

Do You Need to Adjust Your Withholding?

It’s nice getting a couple thousand bucks back from the IRS each April, right?  Of course it is, but its nicer to not hand it over to them in the first place if its just going to be coming back to you in a refund.  When you allow your employer to withhold too much, you are essentially loaning your money to the government all year.  Your goal should be to have your employer withhold only enough to cover the taxes you actually owe.  The IRS Withholding Calculator can help you determine how many exemptions you should claim on your W-4.  You may need to go back to the IRS Withholding Calculator when you experience major changes in your life, such as marriage, divorce, death of a dependent, birth of a child, other personal financial changes, or changes in the law.

However, take care that you don’t underwithhold either because if your employer does not withhold enough, then you will find yourself owing the IRS.