Fiscal Cliff Impact: Here's How Much Money You Could Lose

Fiscal Cliff Impact: Here's How Much Money You Could LoseStudents, single or married Americans, victims of the foreclosure crisis, active market investors and just about everybody in between stand to lose some amount of money if Congress fails to stop us from going over the so-called fiscal cliff.
It’s not easy to put an average dollar amount on the loss for each American, but the expiring payroll tax cut alone – and that’s just one component – could take more than $2,000 from each household.
Efile.com projects that  average American tax bill will increase by an estimated $3,800.
Many of the following expiring tax breaks may be extended or renewed by Congress, but under current law they are all set to expire on December 31, 2012. Here’s a good breakdown of the “fiscal cliff” impact provided by efile.com:
The Bush-Era Tax Cuts
If the so-called Bush-Era tax cuts from 2001 and 2003 are not extended again, taxpayers at all income levels will face various tax hikes:
o Decreased Income Tax Rates: If the tax cuts are not extended, everyone’s tax rate will go up. The 10% tax bracket will disappear and be replaced by a broader tax bracket with a tax rate of 15%. The tax rates of all the other tax brackets will increase, as well:
10% bracket will increase to 15%
25% bracket will increase to 28%
28% bracket will increase to 31%
33% bracket will increase to 36%
35% bracket will increase to 39.6%
o Child Tax Credit Increase: The popular Child Tax Credit will decrease in value from $1,000 per child to $500 per child. The refundable portion of the credit will be less valuable.
o Child and Dependent Care Credit Increase: The amount of the Child and Dependent Care Credit will be less than it was in 2012. Also, the credit will begin to phase out (decrease in value) at lower income levels.
o Adoption Tax Credit Increase: The Adoption Tax Credit will fall in value from 2012 to 2013. So will the amount of employer-provided adoption assistance that is tax-free.
o EIC Expansion: In 2013, the additional Earned Income Credit for having a 3rd child will be eliminated, making the EIC less valuable for families with 3 or more children.
o Estate Tax Cuts: The estate tax exemption amount will decrease, while the estate tax rate will go up. Also, estate tax exemptions will no longer be portable between spouses. Furthermore, you will no longer be able to deduct any state and local estate taxes you paid from the federal estate taxes you owe. Finally, the deduction from estate taxes for “qualified family-owned business interests” will be eliminated.
o Lowered Capital Gains Tax Rate: The tax on capital gains will go up from 15% (or 0% if your tax bracket is lower than the capital gains tax rate) to 20%.
o Lowered Dividends Tax Rate: The tax on income from dividends will more than double from 15% to a whopping 39.6%.
o Marriage Penalty Reduction: Congress somewhat corrected the “marriage penalty” in 2001 by increasing the 15% tax bracket for married filers to double that of unmarried filers, and by increasing the standard deduction for married filers to double that of unmarried filers. Unfortunately, the old numbers are coming back unless Congress does something.
o Repealed Personal Exemption Phaseout (PEP): The Bush Era Tax Cuts did away with income-based phase-outs of personal exemptions. In 2013, your personal exemptions will be reduced in value or disallowed if your income is over a certain amount, depending on your filing status.
o Repealed Limitations on Itemized Deductions (the “Pease limitation”): The Bush Era Tax Cuts also repealed the so-called “Pease limitation” on itemized deductions. On 2013 Tax Returns, the total amount of itemized deductions may be limited based on income and filing status.
o Revised Coverdell ESA Rules:  The contribution limit for Coverdell education savings accounts (ESAs) will decrease, and contribution options will be more limited.
o Increased Student Loan Interest Deduction: The Student Loan Interest Deduction will no longer be indexed for inflation, and the maximum deductible amount will decrease.
o Tax-Free Scholarships: In 2013, student scholarships will generally be considered taxable income.
Payroll Tax Cut
The current 4.2% Social Security tax rate for workers is scheduled to go back up to 6.2%. Self-employed individuals will have to pay the full 12.4% as part of their Self-Employment tax.
Income Exclusion for Canceled Debt on Principal Residence
Although mortgage debt forgiven by a lender is generally considered taxable income, the Mortgage Forgiveness Debt Relief Act allowed you to exclude from income any canceled debt on your primary residence. This lifted a hug tax burden for almost anyone going through a foreclosure or a mortgage refinancing. Unless Congress changes the law, any mortgage debt canceled in 2013 will be taxable income. This could spell trouble for anyone whose finances are already so underwater that they are facing home foreclosure.

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