The Many Ways Your Taxes Could Go Up in 2013 (Even If You’re Not Rich)

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JIM WATSON / AFP / GETTY IMAGES

President Barack Obama speaks during a press conference in the East Room of the White House in Washington, Nov. 14, 2012.

The No. 1 issue on Capitol Hill these days is the so-called “fiscal cliff,” or the set of tax increases and spending cuts that will go into effect Jan. 1, 2013. A Congressional Budget Office Report issued this month projected that these provisions would save the government $448 billion next year alone, but that savings would come at the cost of slower growth and higher unemployment — throwing the economy back into recession and likely driving unemployment above 9%.

(PHOTOS: The Recession in Pictures: America Copes with a Stagnant Economy)

President Obama and Congressional leaders are eager to avoid such a scenario, but the two sides remain far apart on how they will divvy cuts in spending and tax hikes in such a way that doesn’t throw the economy back into recession. In addition, it is widely believed that for the President to win Republican cooperation on a deal, a tax and entitlement reform package would have to be included — meaning that a compromise to avoid the fiscal cliff could potentially be part of one of the most wide-reaching legislative packages in some time. And Congress has but six weeks to strike a deal.

If the enormity of this task makes you a little suspicious of Congress’ ability to tackle it, then perhaps you should prepare for taxes to go up in a big way in 2013. How exactly will “going over” the fiscal cliff cause you to pay more in taxes? Here are the three main components of the tax increases:

Expiration of the Bush Tax Cuts

President Bush and Congress enacted tax cuts in both 2001 and 2003. The 2001 cuts were in response to the budget surpluses (remember those?) that the U.S. Treasury had been accruing since the late 1990s. Additional cuts were enacted in 2003 to stimulate the economy from the 2002-2003 recession. But because these tax cuts were approved along party-line votes using the budget reconciliation process, they could only be enacted for 10 years. (Senate rules state that legislation that increases the deficit for more than 10 years requires a 60-vote majority to pass.) In 2010, the cuts were extended for two more years as part of a compromise that led to temporary payroll tax cuts and extended unemployment benefits. But they are set to expire once again in 2013. Everyone in Washington is in agreement that the tax cuts for those outside the top tax bracket should be extended, but absent a deal, every working American will be hit with a marginal tax rate increase of 5% on average, according to the Tax Policy Center.

(VIDEO: TIME Explains: The Fiscal Cliff )

Alternative Minimum Tax

The Alternative Minimum Tax sets a tax-liability floor of 28% for high-income earners. The problem is that the AMT is not indexed to inflation, so each year it ensnares more and more middle-income Americans. If the law isn’t “patched” by increasing the level of income at which taxpayers must pay the AMT, then tens of millions of taxpayers will owe much more to the government than they are used to owing, and they’ll owe that money retroactively for 2012. That’s right: if nothing is done to patch the AMT, you could find yourself with a much lower tax return, or even owing the government money when you file your taxes in a few short months.

Expiration of the Payroll Tax Cuts

As part of the 2009 stimulus package, President Obama and Democrats gave working Americans a “Making Work Pay” tax credit of $400 for working individuals or $800 for working families. But Republicans refused to extend that in 2010, so the president and Democrats replaced it with a temporary payroll tax cut, which lowered the rate workers pay in Social Security taxes from 6.2% to 4.2%. The measure was always intended to be a temporary method of stimulus, and the question was when it would expire, not if. Despite the still-convalescent economy, word came earlier this fall that both Democrats and Republicans in Congress were willing to let the tax cut expire. President Obama, on the other hand, wants to keep the measure or something similar — like a return of the Making Work Pay credit — in order to maintain support for the recovery. If something isn’t done, however, your taxes will go up by 2% of your gross annual income up to a maximum of $2,202 for those who make $110,100 and up. Single workers making $50,000 will take home $83 less each month.

Nobody knows what Congress and the president will agree to in the next six weeks, or if they will come to an agreement at all. But the law, as it stands now, is chock full of tax increases for earners both rich and poor. President Obama and Republicans in Congress have stressed their desire not to raise taxes on the middle class, but unless they can find a compromise on a broad range of issues, you should prepare to see your take-home pay drop in the new year.

MORE: Will the Global Economy Tumble Off America’s Fiscal Cliff?

18 comments
ssClear
ssClear

Do you know what this tells people?  It tells people that their money is being fluctuated on a due to expire coupon system, where presidents bring in ideas to temporarily patch the economy by giving a little $400 here a little $900 there, making the public think it’s enough to change the current debts of the people and this country.  When their idea is no longer active the public feels it no matter if who passed this document due to expire is still in office or there is a new President in the seat, therefore, bringing a big question mark on the overall fiscal balance of the United States and the people who are looking to cultivate the country whether rich or poor. 

 

em4rtz
em4rtz

I graduated college this past spring with a health science degree. Still haven't had luck finding a job suitable for my concentration, so I've just sucked it up and been doing a job that I could've got out of high school. After the past couple months of continuous search and sending my resume out countless times, Ive given up... joining the military.

momlou58
momlou58

Maybe if they cut all the government big wig's pay and benefits. and stop spending our money on stupid crap (supporting the 47% lazy asses who have never held a job, and do not want to, and the illegals). We would NOT have a fiscal cliff.

DarleneDove
DarleneDove

When will people realize paying the government is paying for perpetual war and our own enslavement. We have to take our power back and live with dignity and integrity. How can anyone participating in this perpetual war and endless web of lies have any self-respect?

RobertCassis
RobertCassis

Wait.  I thought the president was against raising taxes.  Now it is suddenly his goal?  He is perfectly willing to hit the cliff and raise everyone's betting that you will blame Republican's more than him.  Not to mention his health care taxes which is DIRECTLY a tax on the middle class.  (Everyone else gets credits). 

RichSnyder
RichSnyder

Is worth paying a bit more to help reduce the deficit (we have to pay down cost of Cheney wars before we pay down money spend in the US).  My tax cut was about $600, and the SS cut was likely to expire anyway (Mitt/Ryan wouldn't do this and 20% ATB at the same time) - that's $12 a week which barely covers extra cost of gas (which goes to Exxon), but I save more than that when I quit cigs 2 months ago.  Best of all Papa John, Exxon CEO, et al will have to pay a bit more percentage like the rest of us.  After the Cheney wars are paid off, then we can look at lower taxes again - even Mitch Daniels (he'd have won had he run against Obama) had to temporarily raise taxes to get IN out of its fiscal mess.   Repubs want wars/defense spending, but they don't want to pay for it - they make no sense.

mzgsyn76
mzgsyn76

GREAT, NOT BRINGING IN ENOUGH NOW, GUESS I'VE GOT NOTHING TO LOOK FORWARD TO BUT ABSOLUTE POVERTY.  THANKS TO ALL THOSE WHO ARE MAKING HUNDREDS OF THOUSANDS. I'M LUCKY IF I CAN BRING $1400 IN A MONTH!

Roadhammer
Roadhammer

@em4rtz Even though I don't like hearing that you have given up I will thank you in advance of your decision to join the military. Young collage grads will be devastated in this job market for along time to come.  

SwiftrightRight
SwiftrightRight

@momlou58 Stupid crap like a super carrier fleet designed to fight the Soviet Union? Or possibly stupid crap like giving armored personal carriers to small urban PDs? Or maybe the 22 billion dollars of subsidies we give to coal mining consortium?

Do you have any proof that 141 million Americans are lazy/useless and or illegal or are you just regurgitation what you heard on Fox?

KristineAz
KristineAz

@RichSnyder psssttt... It's Democrat presidents who have gotten us involved in more wars AND sent out military into more foreign countries.  Not Republicans.  History didn't begin 20 years ago.

sokustrokus
sokustrokus

@RichSnyder Deficit? Really? You believe all that 99% crap? Look, I agree tax increases are required but ... the spending spree needs to STOP! Sure, they'll probably agree to tax millionaires and billionaires, (not the $250,000) but ... why should taxpayers pay for Obama's votes? Why increase taxes IN ORDER to pay off drastically increasing entitlement programs? Stay on topic. btw, All companies, ALL COMPANIES,  use current tax codes the best way they could, (even Pelosi) ... and they need to be reformed, period. Cheney wars? Quoting the beloved wiki : "The Iraq Resolution or the Iraq War Resolution, enacted October 16, 2002, is a joint resolution passed by the United States Congress in October 2002 as Public Law No: 107-243, authorizing military action against Iraq. Your party sure loves to blame others all the time.

KristineAz
KristineAz

@mzgsyn76 So because other people make more money than you, it's their fault for you not having a higher salary?  Uh, how's that?  Your life is YOUR life.  YOUR choices.  Don't blame your situation on successful people who earned their money.  Your envy is drowning you.  If you're THAT poor, then you are qualified for free grants for education and tech training.  So take advantage of what's available to you instead of complaining about people you actually want to be like if you were being honest.

sokustrokus
sokustrokus

@mzgsyn76  Let me get this straight ... you are blaming your poverty (or less income) on all "those making hundreds of thousands"? This article is about taxes ... money that is TAKEN from you. Ask yourself "Who is taxing me?" ... then, ask yourself  "Why? ... Where is your tax money going?"You wrote: "I'VE GOT NOTHING TO LOOK FORWARD TO BUT ABSOLUTE POVERTY."Sadly, you may be right ...hope your situation improves.

QuarkHadron
QuarkHadron

@sokustrokus @RichSnyder Unfortunately, judging from history, the most likely outcome from this Congress is higher taxes (which are needed) and HIGHER spending.