Survive the ‘fiscal cliff’? Now watch your paycheck take a dive
When the first paycheck of 2013 is lighter than the last one of 2012 for wage-earners, the place to look for an explanation is Congress and the agreement to avert a step over the so-called “fiscal cliff.”
The agreement among Senate Democrats, House Republicans and President Obama cemented marginal income-tax rates for most people at 10, 15, 25, 28, 33 and 35 percent for taxable income under $400,000 or $450,000 for married taxpayers filing jointly, and it indexes those rates after 2013.
People with taxable incomes higher than the $400,000 level saw their rate rise from 35 percent to 39.6 percent.
Those figures, however, don’t address the cause of the lighter-than-last-year’s paychecks.
The agreement ended a Social Security tax holiday under which 4.2 percent of earnings were withheld instead of 6.2 percent.
That will translate to a paycheck-shrink of $50 for a wage-earner bringing in $30,000 a year, $100 less a month for someone earning $60,000.
“This isn’t income tax. Strictly speaking, you have to look to FICA,” the Social Security system, said Jim Grisier, a certified public accountant in Grand Junction. “But for the guy who’s taking home a paycheck, it’s less money.”
The fiscal cliff deal takes away for the moment a major worry for many tax planners — the possibility of large numbers of taxpayers being exposed to the alternative minimum tax.
The alternative minimum tax was enacted in 1982 to limit the deductions of high earners, but it was never indexed to inflation. That required Congress to act on it annually, but it failed to do so in 2012.
That lack of action could have exposed millions of taxpayers to 2002 tax rates — the ones in effect before the so-called Bush tax cuts that were temporary until the fiscal-cliff deal made them permanent for all but those individuals earning $400,000 annually or more.
The cliff raised the floor for the alternative minimum tax from $33,750 to $50,600 for individuals and from $45,000 to $78,750, for married couples filing jointly. It also indexed the levels to inflation.
Another aspect of the deal was the freezing of current estate tax rates. Reducing to $1 million the point at which estates could be taxed, as contemplated in the repeal of the tax code under President George W. Bush, “would have affected tons of people” in western Colorado, Grisier said, noting that estates can quickly amount to $1 million. The deal kept the current level of $2.5 million per individual, or $5 million for a couple filing jointly.
“That’s a huge benefit,” Grisier said.
Wage earners, meanwhile, can make up for their lighter paychecks using some modern banking techniques, said Yanus Nelson, Western Slope president for Wells Fargo’s retail banks.
In addition to careful budgeting, consumers can use banks to track spending to see where they spend their money and make appropriate adjustments, Nelson said.
Transferring expensive credit-card balances to fixed, unsecured loans also could save significantly by taking advantage of lower interest rates, Nelson said.
Consumers also can use smartphones or computers to set up such things as account alerts to let them know if account activity is approaching pre-set levels, Nelson said.
The reduced paychecks can be offset with planning, Nelson said.
“It can be significant,” he said. “With the economy as it is, every nickel counts.”