We now know that Congress did not recklessly drive the economy off the fiscal cliff like the ending in the movie of “Thelma and Louise.” Nevertheless, we are in for more wrangling, swagger and blustering while Congress and the President try not to bump their heads on the debt ceiling, a debate in store for all of us next month. In the meantime, experts have now analyzed the deal Congress made with the President and it looks like households making between $200,000-$500,000 per year save the most in comparison to where they would have been had we careened off the cliff.

Also attached for your reading enjoyment is a post our blog editor had chambered but inadvertently did not get out before the fiscal cliff deal was made. (The Fiscal Cliff’s Impact On Construction) The article discusses the impact to the construction industry had the logjam in Congress not been broken.  Referenced is an interesting article by Prof. Stipanowich, who draws comparisons to Lincoln and his ability to pass the 13th Amendment and President Barack Obama and his ability to negotiate a deal with Congress.

Fundamentally striking the deal on the “sequestration,” as the fiscal cliff is known in congressional terms (sequestration refers to automatic spending cuts), means that the President and Congress gave us all a tax hike. Expiring payroll tax lowers everybody’s after-tax income by at least one percent. There are three major tax issues which add up to modest tax increases for the bottom 99% and much greater tax increases for the top 1% of the taxpayers.

  • Five-Year Extension Of The Stimulus Tax Credits.  The 2009 stimulus package expanded three tax credits, the Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit. The fiscal cliff deal extended all of these tax credits for an additional five years. Under these credits households can receive tax refunds even if their tax liability is zero.  To get this credit, households must have paid some taxes to begin with.
  • Expiration Of The Payroll Tax Cut Holiday.  In the past two years, the worker’s half of the payroll tax had been cut two percentage points from 6.2% to 4.2%. That tax break is now over and therefore everybody will take home less money in 2013 than in 2012, though  the impact will not be as big for households making $200,000 and over because payroll taxes are only paid on the first $110,100 of income.
  • Top Marginal Rate For Incomes Over $400/$450,000 Returns To 39.6%. The top marginal rate for singles earning over $400,000 or couples earning over $450,000 went back up to 39.6%. This is a marginal rate, which means the more income you have above the threshold, the harder the higher rate hits you. As far as capital gains are concerned, capital gains rate rose from 15% to 23.8% for individuals making $400,000 or more and for joint filers making $450,000 or more.

The big winners are what are affectionately known as “HENRYs” (High – Earner – Not – Rich – Yet).  Those households making between $200,000 and $500,000 a year, will mostly avoid marginal tax increases because the threshold for higher rates was set at $400,000/$450 000 instead of the $200,000/$250,000 President Obama originally wanted.


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