The Fiscal Cliff package passed this week. Rhetoric aside, your payroll taxes and self-employment taxes will most likely increase by 2% of your income. This means that if your business makes $100,000 this year, you’re going to need to send an additional $2,000 to Washington that you didn’t have to send last year. If you have a salary (gross income) of $100,000, an additional 2%, or $2,000, will be deducted from your paycheck before you can spend or save it. Happy new year!
It’s not so easy to gauge exactly how the new law benefits or hurts most taxpayers because tax law is insanely complex and intentionally obfuscated by political rhetoric. That said, the middle-class and budding entrepreneur class will probably pay more in taxes than they did last year (see previous paragraph). However, the tax increases could have been a whole lot more severe. The Alternative Minimum Tax (AMT) had threatened to slam most taxpayers with huge surprise tax bills this April. The new law indexes AMT for inflation – you probably don’t need to worry about it anymore. Furthermore, federal estate taxes, dividend taxes and capital gains taxes also increased. Count your blessings. These increases could have been more confiscatory.
I am puzzled how the government can cut projected revenues while postponing cuts in expenditures. Reasonable people, when faced with a drop in income, either find the money elsewhere or cut expenses. I don’t know how government defies this logic.