Taxmaggedon

You may have read or heard about the “fiscal cliff” and “taxmaggedon.”

There are a couple of things going on here. Taxmaggedon refers to tax increases and the fiscal cliff refers to the federal budget and sequestration. The combination of the two is slated to happen in less than 3 months unless Congress and the White House act.

Let’s talk about the taxes.

There were revisions made to the tax code back in 2001 and 2003. These revisions have become known as the “Bush tax cuts,” which seems a reasonable description, and the “temporary tax cuts,” which doesn’t seem so reasonable. My daughter was in elementary school back when these tax changes were made. Today she is in college. To refer to these tax cuts as “temporary” is an abuse of the language.

Congress’ new thing is to put an expiration on tax legislation. It is somewhat like getting married but giving your spouse a term of only 5 or 7 years. At that date the marriage would be reviewed and – if found advantageous – would be extended for another period. I suppose one could stretch such a marriage out for many decades, but it seems bad form. Congress however seems to think that this is a fine way to pass tax law.

 A lot of tax law is expiring very soon. When it does, chances are that your taxes are going up. Why? There are a few items in there that we have come to take for granted, and by “we” I mean ordinary people who set an alarm clock and leave for work every day. Here are some examples:

(1)    Do you like your 10% individual tax rate? Well, that rate is going away. Sorry.

(2)    Have you managed to stash a couple of dollars in a mutual fund for your kids’ education? Tax on the dividends from that mutual fund will no longer be capped at 15%. Only rich people have mutual funds anyway.

(3)    Remember the tax marriage penalty? That used to mean that two people – if married – pay more taxes than if they had remained single. The penalty is back.

(4)    Are you selling that mutual fund when your kid starts college? If you have a gain, your tax is going up. See (2) above about owning mutual funds.

(5)    Certain credits, such as the education credits, will be reduced. The child credit, for example, will drop from $1,000 to $500 per eligible child.

(6)    Your social security withholding will increase from 5.65% to 7.65%.

Is it going to happen? I have no clue. But if it does, it will not be confined only to the “rich.” It will be all of us – at least, those of us who still pay taxes. That is one of the things that the “Bush tax cuts” did, by the way: remove millions of people from the tax rolls. There was debate at the time whether it was beneficial for society to divorce so many people from contributing to everybody’s government. It will be gallows humor to see the politicians tap dance when those millions return to the tax rolls.