On New Year’s Day January 1, 2013, Americans will face a $494 billion tax increase, the highest ever in one year. Congressional aides, according to The Washington Post, started calling it “Taxmageddon“ — reference to its apocalyptic knock-on effects. Federal Reserve Chairman Ben Bernanke has also called it a “massive fiscal cliff” for the economy. And it’s not difficult to see why. The Bush tax cuts of 2001 and 2003 are scheduled to expire on December 31, 2012, unless Congress acts to extend or modify the rates. Currently both dividends and long–‐term capital gains are taxed at 15%. In 2013 the tax on long–‐term capital gains may return to 20% and the added Medicare Contribution Tax (MCT) will take the maximum tax rate to 23.8%. For dividends, the rate would return to 39.6% (ordinary income rate) and when the MCT tax is included the maximum rate will rise to 43.4%.
Contrary to President Obama’s rhetoric about “the wealthiest Americans” taxmageddon falls primarily on middle and low income citizens. That’s because 60 percent of the Bush tax cuts went to middle- and low-income taxpayers. The expiration of the patch on the Alternative Minimum Tax (AMT) will cause these taxpayers to pay a tax that was never supposed to hit them, and the expiration of the payroll tax cut is a tax hike almost exclusively on middle- and low-income families.
In addition, beginning in 2013, the employee part of the Medicare tax, part of FICA, will be increased to 2.35% from 1.45% family AGI above $250,000 or individual AGI above $200,000. This 0.9% increase is applicable to earned income. In 2013, a 3.8% Medicare Contribution Tax (MCT) will take effect. In essence this is a new tax on investments. The MCT will be an additional tax on Adjusted Gross Income (AGI) for most joint filers with AGI above $250,000 and will incorporate unearned income which includes interest, dividends, royalties, annuities and rents. Previously the Medicare tax applied only to earned income.
According to the Heritage Foundation “families will see an average tax increase of $4,138. Baby boomers’ average increase will be $4,223, and low-income taxpayers can expect a $1,207 increase. Millennials will be hit with an average hike of $1,099, and retirees $857.”.
This is only the direct impact on individual taxpayers. Americans at all income levels will feel the pain of Taxmageddon, because it will slow job creation and wage growth. At 8.2 percent unemployment, it’s the last thing the economy needs.