How will the fiscal cliff compromise bill affect you?

By Shira Schoenberg | | January 3, 2013

With all the discussion about the compromise bill that President Barack Obama signed into law averting the so-called “fiscal cliff,” how will the bill impact you? Here are a few scenarios.

The Unemployed

In November, the state Division of Unemployment Assistance notified 45,000 Massachusetts residents who were receiving federal extension benefits that their benefits will end Dec. 29. Those benefits were an additional 28 weeks of unemployment compensation approved by Congress as a way to help those struggling in the recession. The federal benefits were added to the 26 weeks of benefits provided by the state.

The compromise bill extended the federal unemployment benefits extension for another year. Alison Harris, director of communications at the Executive Office of Labor and Workforce Development, said Wednesday that the state is still working to understand the details of the bill – including who will be eligible and for how many weeks people can receive extended benefits. In previous benefits extensions, after the bill was passed, the U.S. Department of Labor would analyze it and give instructions to the states. Harris said anyone receiving unemployment benefits should continue to file for benefits as they would on any other week, as the state works out the details.

Individuals with income above $400,000 and couples with income above $450,000

This is the group that will be hit by the biggest tax hike. For these taxpayers, the tax rate will rise from 35 percent to 39.6 percent. The capital gains tax rate will also rise on these taxpayers from 15 percent to 20 percent. The Affordable Care Act adds another 3.8 percent surcharge on investment income for singles earning more than $200,000 and couples earning more than $250,000. So for the highest earners, capital gains will actually be taxed at a rate of 23.8 percent.

Ben Forman, research director for the think tank MassINC, estimated that less than 1 percent of households in Massachusetts earn more than $450,000 a year.

Even so, Alan Clayton-Matthews, associate professor and director of quantitative methods at Northeastern University’s School of Public Policy and Urban Affairs, said a higher percentage of households in Massachusetts will be impacted by the tax increases on high-income individuals, compared to households around the country, because Massachusetts is a wealthy state. “We have a number of households with two earners which combined would put them over the threshold, and combined many households would have income that high from investments,” Clayton-Matthews said.

Individuals with income above $250,000 and couples with income above $300,000

These individuals will also pay higher taxes because of new limits on deductions and exemptions. According to Roberton Williams, a senior fellow at the non-partisan Tax Policy Center, taxpayers above that threshold who itemize deductions – including deductions for charitable contributions, mortgage interest, or anything else – will see their deductions reduced by 3 percent of the amount by which their adjusted gross income exceeds the threshold. For example, a couple earning $400,000 – $100,000 above the threshold – would see their itemized deductions reduced by $3,000. (A taxpayer is guaranteed to keep at least 20 percent of their itemized deductions.)

The personal exemption – which last year was a $3,800 deduction for each individual in a household – will also be reduced for those taxpayers, but on a different scale. Above the $300,000 threshold, a couple will lose 2 percent of their personal exemption for every additional $2,500 they earn – so a couple earning above $422,500 will lose their entire personal exemption, Williams said. The phasing out of personal exemptions for high income earners was part of the law until 2001, but was eliminated gradually by President George W. Bush’s tax cuts.

The U.S. Census does not provide data specifically about income above $300,000. But according to the Census Bureau’s 2011 American Community Survey, 7.2 percent of Massachusetts households earned more than $200,000 a year, compared to 4.3 percent nationally.

Individuals with incomes below $250,000

For these taxpayers, the tax cuts implemented under Bush will be continued permanently. Rates will not rise and deductions will not be impacted. The deal also extends for five years Obama’s expansions of the child tax credit and earned income tax credit, as well as Obama’s new American opportunity tax credit, a tax credit for higher education costs for low-income families.

However, all taxpayers will be affected by the expiration of a 2 percentage point break in the Social Security payroll tax, which was put in place for 2011 and 2012. The rate will go from 4.2 percent to 6.2 percent for all taxpayers.

The Social Security payroll tax break is worth around $1,000 for a worker earning $50,000 a year.

The Associated Press, citing the Tax Policy Center, provided a chart estimating the total tax increase on households earning different amounts, ranging from an average tax increase of $297 for those earning $20,000 to $30,000 annually to an average tax increase of $170,341 for those earning over $1 million.

Businesses reported Wednesday on the impact to businesses of the fiscal cliff deal. Business tax breaks on research and development and on equipment write-offs were continued – though possibly too late to make a difference in 2012 spending. Tax credits for renewable energy production were also continued.

One of the biggest potential impacts on Massachusetts – the spending cuts – remains uncertain. The compromise bill postponed “sequestration,” scheduled cuts split between defense and domestic spending, for two months. But it left open the possibility of cuts in the future.

Forman said Massachusetts has a large number of defense and medical research companies, both areas that could be impacted by the proposed cuts. “The key question for us is what will happen with the defense budget…and domestic spending on research,” Forman said. “Those are the things on the chopping block and we still don’t know. We kicked the can down the road two months on those things, and uncertainly is never good for the industry.”

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