Tax Law: Fiscal Cliff Notes and the Tax ramifications of the American Taxpayer Relief Act of 2012 and Sequester Cuts

The “sequester” recently gobbled up headlines across national media. It has developed so much hype that many may have forgotten they already watched this movie’s first installment earlier in the year called “The Fiscal Cliff.”

The American Taxpayer Relief Act was the federal government’s initial solution to the fiscal cliff. It was described as a temporary patch to a much bigger problem. It aimed to reduce some tax hikes while hoping to raise revenue additional revenues.

 It would probably be fair to criticize the use of the word “relief” in the title. The law did not provide any relief from existing tax circumstances; rather it preemptively changed some additional tax burdens that were set to be enacted by default in 2013.

 Essentially, the American Taxpayer Relief Act raised taxes on everyone who pays taxes in the country in some form or another.

This has left many confused, as most media coverage focused on the “Millionaire Tax” storyline. Many have commented as a result saying they thought taxes were only raised on millionaires.

Even if you are not a millionaire, your taxes went up. The aforementioned “millionaire tax” referred to the increase in tax rates for annual incomes above $450,000. The tax rate for those earners increased from 35% to 39.5%. These people may be very wealthy, but may not be millionaires.  

In fact, people who are nowhere near millionaire status also saw their taxes go up. The American Taxpayer Relief Act also increased Federal payroll taxes. The government reminds people that this is not a new tax, rather a tax that was on holiday that is now returning.  

Anyone who receives a paycheck has seen 2% less money on it since the American Taxpayer Relief Act went into effect. Employees must be mindful that this is not their employers’ fault. Employers are not docking pay, the federal government is.

 The majority of other tax changes predominately target wealthy people. Tax creases on capital gains and dividends were increased and made permanent. The law now holds that these two forms of income will be taxed at a 20% rate for those reporting incomes of over $450,000, and a 15% rate for all others.

 The federal estate tax rate was increased to 40% and applies to estates in excess of $5,250,000 for people dying in 2013. Much of the discussion surrounding the “Sequester” are storylines leftover from the “Fiscal Cliff.” No significant spending cuts were agreed upon, which was a stipulation of a prequel to the “Fiscal Cliff” called the “Debt Ceiling Crisis”. Many may remember that one before it was drowned due to the Presidential Election. That set the stage for this third installment now known as the sequester.

In question are $100 billion in across the board cuts that continue to be discussed by the Senate, House of Representatives, and the President of the United States. Discretionary cuts are already in place between the defense and non-defense industries. A White House committee wrote legislation to mandate these cuts go into effect as a scare tactic to force a divided Congress to negotiate more effectively. It backfired.

Ultimately, the government is now charged with drastically reducing the deficit, which continues to grow and hinder the economy. As both sides continue to discuss what to do next, the one thing that may be inevitable is that there will be additional changes to the tax code that employers and employees alike will need to be aware of.