President Obama has had hardly a moment to bask in his win. Looming ahead is January’s so-called fiscal cliff — the tax hikes and spending cuts that will kick in automatically if the White House can’t cut a deal with Republicans in Congress before year-end.
For you, that means uncertainty about the taxes you’ll face in 2013 and beyond. Without an agreement, most marginal income tax rates will rise, and the top long-term capital gains rate will go from 15% to 20%.
The fiscal cliff may give Democrats some leverage in striking a deal on the deficit, with consequences for the future of Medicare and Social Security.
The President’s reelection also keeps his signature legislative achievement, the 2010 health care law, on schedule.
What to expect right away
One tax is all but certain to go up in 2013: As part of health reform, high earners will pay extra Medicare taxes on modified adjusted gross income above $250,000 for a married couple — 0.9% if it’s earned income and 3.8% on investment income, including capital gains.
Less clear is whether Obama will seek to keep the Social Security payroll tax at 4.2%, instead of the usual 6.2%. Come January, your paycheck may be smaller.
The big question is what happens to the expiring Bush-era tax cuts. Obama’s long-standing position has been to keep them for joint filers with an AGI below $250,000 — about $270,000 now if the campaign promise is adjusted for inflation.
If there’s no deal by Jan. 1, an agreement could still be struck in 2013. But then, says Henry Aaron of the Brookings Institution, the debate would be over new tax cuts, not about avoiding increases.
Should you make any end-of-the-year moves to get ahead of tax hikes?
Perhaps, but tread carefully. Mark Luscombe, an analyst for the tax services company CCH, says that if you were thinking of selling shares soon, you could do so before Jan. 1. Just don’t put short-run tax concerns ahead of an investment strategy — it’s often better to let your money keep growing.
This caveat goes double if you are earning below that $250,000 line. “Everyone says they want to keep rates the same for those people,” says Luscombe.
…If there’s a “grand deficit bargain”
Obama has said he may use the face-off over the fiscal cliff to strike a deal to raise tax revenue and reduce the deficit. In past talks, Obama has reportedly been willing to consider raising the Medicare age and changing the Social Security benefits formula (perhaps by slowing the rate of inflation adjustments).
The President’s current proposal for fixing Medicare is to focus on paying less to providers, not reducing benefits. The idea is to create incentives for hospitals and doctors to reduce inefficiencies.
As for Social Security, Obama has argued for making more of high earners’ income subject to payroll taxes. In 2013 you won’t pay the levy on earnings above $113,700. What Obama has proposed in the past is bringing back that tax on income over $250,000.
…In the next two years
The most predictable impact of Obama’s reelection will come in 2014, when people who don’t get health insurance at work will be offered a menu of health plans that won’t be able to turn you away or charge you more based on your health. Earnings-based subsidies to help pay premiums will be available. Without coverage you may face fines.
And then comes another midterm election.