Article courtesy of COSE
As the 2012 election comes to a close, lawmakers will return to Capitol Hill to deal with potential tax increases and automatic spending cuts. If Congress does not tackle these issues by the end of 2012, individuals could see their tax bill increase.
Much has been said about the “fiscal cliff,” but what really is the fiscal cliff? The term, “fiscal cliff” refers to pending tax increases from expiring tax cuts at the end of 2012 and automatic spending cuts passed in the Budget Control Act. Below are details related to the potential tax increases and automatic spending cuts.
Potential Tax Increases
If Congress does not act between now and December 31, the following tax cuts will expire:
- Individual tax rate brackets will increase to pre-2001 rates of 15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent. Currently, individual tax rate brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent.
- Tax rate on capital gains and qualified dividends will increase to 20 percent and 39.6 percent. Currently, the tax rate is 15 percent.
- Child tax credit will decrease to $500 from its current $1,000 credit.
- Estate tax exemption and tax rate return to $1 million and 55 percent from the current exemption of $5,120,000 and 35 percent.
- The Alternative Minimum Tax (AMT) patch expires.
- The extended payroll tax cut expires. Congress extended the payroll tax cut for 2011 and 2012.
Automatic Spending Cuts
In August 2011, Congress passed the Budget Control Act, “debt ceiling bill,” which raised the United States’ debt ceiling limit and created a Joint Committee with 12 members of Congress (three Democratic Senators, three Republican Senators, three Democratic Representatives and three Republican Representatives) to create a $1.2 trillion dollar deficit reduction plan.
If the committee failed to reach an agreement and provide recommendations to Congress, automatic spending cuts (called Sequestration) would reduce the deficit by 2.7 percent. The spending cuts would be equal amounts of defense and non-defense spending. Federal programs exempt from the automatic cuts include Social Security, veterans’ benefits, Medicaid, the Children’s Health Insurance Program (CHIP), unemployment benefits, Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP). Medicare payments to Medicare providers are included in the automatic spending cuts, but capped at two percent. In August 2011, the Supercommittee failed to report any recommendations to Congress on deficit reduction 2011.