The media can be real Debbie-Downers sometimes. They spend months covering the negative part of a situation. Then it gets resolved and they are on to the next crisis. The Fiscal Cliff is a great example. For several months, there were all kinds of predictions about the bad things about to happen. However, Congress came through with a deal that fixed several long-term problems.
Very little coverage was given to the details of the deal before the media began talking about the looming debt ceiling crisis. I’d like to take a step back and go through some of the good stuff in the Fiscal Cliff deal.
Tax rates are permanent
That’s right, the current tax rates are permanent! I doubt there will ever be enough votes in Congress to change these income tax rates and capital gains tax rates. This takes out all of the uncertainty that revolved around the Bush tax cuts for 12 years. And certainty is really good for the stock market.
What’s also good is that the 10 percent tax bracket survived. It was set to expire and would have been difficult to get back.
Capital gains and dividends will continue to be taxed at 15 percent as long as you make less than $400,000 for singles and $450,000 for married couples. This is a great win for investors. They only pay 15 percent tax on money they make from investments held at least one year. Low rates on capital gains and dividends encourage people to invest and that’s good for the economy.
One big problem fixed in the Fiscal Cliff deal was the Alternative Minimum Tax (AMT). This tax law makes sure people that have too many deductions still pay their fair share in taxes. The problem was the income level never adjusted for inflation, so this tax was hitting more middle-income families. AMT now adjusts with inflation and will only be paid by those higher-earning families with lots of deductions.
Payroll tax goes back to 6.2 percent
You may be thinking that going back to the 6.2 percent payroll tax is a bad thing. However, it’s a good thing in my book. Congress gave us all a tax break for two years by lowering the payroll tax to 4.2 percent. Now it’s back to the normal 6.2 percent. This is a good thing because this money goes toward Social Security benefits. So instead of seeing a tax increase, think of it as saving an extra 2 percent for retirement.
Roth conversions for 401(k)’s
Something not talked about at all was the rule allowing people to convert some or all of their 401(k) to a Roth 401(k). This is great for people that have all of their retirement savings in pre-tax money and make too much to contribute to a Roth IRA. But plan carefully because any amount converted to a Roth 401(k) results in taxable income.
There isn’t room in this article to cover extended tax credits for college and child care, and the $5 million Estate Tax Exemption. However, know that there was a lot of good stuff in the Fiscal Cliff deal that will help your personal finances.
Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.
