The Fiscal Cliff – in plain English


Absent action by the federal government tax increases and spending cuts estimated by the Congressional Budget Office (CBO) at $671B will take effect.  That estimate for 2013 represents a reduction of the 2012 estimated federal deficit of $1.1T of roughly 60%.  This sharp decrease is why the matter has come to be known as the fiscal cliff.  A recap of where the tax increases and spending cuts would come from is illustrated below:

Cuts Increases


Sidebar: With all the polarized dialog many of us hear please note the “materiality” of increased taxes above $250K and defense spending cuts when compared to a deficit in excess of $1 trillion.

What the fiscal cliff means, should it occur, as individuals is that taxes woud go up across the board and obviously disposable income down as illustrated below:

Average Increases


What the fiscal cliff means in broad strokes, should it occur, as a business owner, withstanding the decreased disposable income of your employees is:

  • The Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) base increases from $110,100 to $113,700. Employers are required to pay-in/match employee withholdings at 6.2%. That equates to a $223 increase for each employee with income that meets or exceeds the new base.
  • Additionally, although not directly related to the fiscal cliff, in addition to the existing Medicare tax of 1.45% (no cap) starting in 2013, the Patient Protection and Affordable Care Act (PPACA) imposes an additional 0.9 percent Medicare tax on wages in excess of $200,000 ($250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing separately). Legislation is somewhat unclear how employers should withhold this additional tax, however consensus in the market “seems” to be that employers should withhold and match the additional 0.9 percent on compensation > $200,000.

For more specificity please see this Hot Link to IRS Questions and Answers for the Additional Medicare Tax.

  • For S Corps and LLCs the Bush credits expire and applicable tax brackets increase as follows:  10.0% to 15.0%,  25.0% to 28.0%, 28.0% to 31.0%, 33.0% to 36.0% and 35.0% to 39.6% .

Regardless of where you may stand on – the economy, the federal deficit – and solutions, legislation will be whatever it will be and is in a state of perpetual change.  The only thing you can control is your own business – be prepared, get good advice on legislation coming down the pike and incorporate into your strategic plan for 2013.

For some perspective on what it takes to get to the debt level we have please see The Universe and the Federal Deficit and Historical Federal Receipt and Outlay Summary.

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