Most Households Face ‘Fiscal Cliff’
By: John D. McKinnon, Kristina Peterson and Josh Mitchell
Almost all American households would take a financial blow next year—and low-income families would be among the hardest hit—if the White House and Congress fail to solve the "fiscal cliff" of big tax increases and spending cuts set to start Jan 2.
A married couple making between $20,000 and $30,000 a year would go from receiving, on average, a $15 tax credit to owing $1,408, according to research by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.
These taxpayers would be part of the roughly 90% of American households that the Tax Policy Center estimates would face higher tax bills for 2013 if Washington cannot craft a deficit-reduction plan to replace the fiscal cliff—the $400 billion in tax increases and $100 billion in spending cuts slated to take effect next year.
The tax increases stem from the fact that various tax cuts and other tax measures all were passed on a temporary basis and are set to expire.
Most of the increases would result from the expiration of Bush-era tax cuts, which would cause marginal rates to rise. Simultaneously, several temporary tax breaks pushed by President Barack Obama after the financial crisis also would end.
And most households—121 million in all—would be hit by an increase in the payroll tax that employees pay to 6.2% from 4.2%.
Also expiring at year-end is a provision to reduce the so-called marriage penalty, a set of tax provisions that require many couples to pay higher taxes when they file jointly. And millions more families' earnings this year would be subject to the alternative minimum tax. The AMT was originally intended to prevent the very wealthy from avoiding taxes but would apply to middle-class households if policy makers don't renew a provision that expired last year.
Additionally, extended federal jobless benefits would end next year for up to five million Americans. Many workers could lose their jobs or be furloughed if cuts to federal spending prompt government agencies and contractors to trim payrolls.
The complexity of the tax code means going over the cliff would affect households in different ways, depending on their income, marital status, number of children and other characteristics.
Low-income households would be particularly hard hit by the loss of provisions in the 2009 economic-recovery act, such as the expanded availability of the earned-income credit and child credit, as well as tax breaks for college expenses.
"For me it's a serious thing," said Traci Petty, 42, a single mother, referring to the fiscal cliff. She is studying for a master's in business administration in Danville, Va., while earning about $30,000 a year working part-time at a nonprofit.
Ms. Petty would be hit by the shrinking of the child credit to $500 from $1,000, the higher payroll taxes and the elimination of the Bush-era 10% tax bracket. Altogether, she would face at least a $1,500 cut in the $4,000 or so tax refund she gets each year. She counts on the refund to pay bills.
Lis De Bats, 54, of Agoura Hills, Calif., said losing unemployment benefits "means that I lose my home." When she lost her job as a sales manager for new homes earlier this year she became eligible for a state program that pays her mortgage for nine months, but that is almost up. She worries that if her federal jobless benefits are cut off in December she won't be able to work with the bank to modify her loan.
Middle-income households would be affected particularly by the higher income-tax rates, the loss of marriage-penalty relief and the reduced child credit. A family with $40,000 to $65,000 in annual income would pay an additional $2,000 in taxes on average, the Tax Policy Center estimates.
Mary Schoenbach, a 20-year-old biology student at the University of Chicago said the scheduled expiration of a tax break for higher-education expenses would cost her parents several thousand dollars and could require her mother to postpone retirement from her job as a hospital chaplain.
"It's really important," she said of the education break. "If that's no longer there, how do we do it?"
High-income taxpayers, including many small-business owners, would be hurt by the higher individual income-tax rates plus higher rates on dividends, capital gains and other types of investment income. A household earning between $200,000 and $500,000 a year would see an average tax increase of about $15,000, the Tax Policy Center said.
Michael Lapkin, 72, a pediatrician who lives in Boca Raton, Fla., said higher tax rates would likely cost him and his family at least $4,000 to $5,000 a year, and prompt them to cut back spending.
Dr. Lapkin went back to work on a part-time basis after retiring to Florida, and raised his hours after the financial crisis to help supplement his investment income. He also has been helping his two adult children financially after they ran into job problems related to the downturn. He and his wife take in a little more than $200,000 annually, a mix of retirement, work income, Social Security and her pension.
Dr. Lapkin said a number of fellow retirees he knows have started working again or moved out of the gated community where he lives. "If taxes go up, it's an even greater burden," he said. He added that he considers himself lucky to be able to work.
Ricardo Pradilla, who owns a commercial construction company in New Jersey, figures he would face a tax increase of $2,200 just from the AMT. He has put business-expansion plans on hold until the tax situation is sorted out, he said.
A tax increase of that size would take an even bigger bite out of a smaller business. Todd Sardini, 41, who owns a home-contracting business in Parsippany, N.J., earns around $75,000 a year and said he likely would face a tax increase of $2,000 to $4,000 a year.
"That's a huge number for me," he said. He said such an increase would reduce his incentive to enlarge his business.
Federal workers and contractors also face the prospect of job and income losses from the scheduled federal spending cuts, but won't know the precise effects until the cuts are specified in more detail.
The Defense Department base budget, for example, would be cut by about 10% over 10 years, which would come out to more than $50 billion a year.
"Everybody's pretty uptight and tense about it," said Dana Edsall, 54, who has worked at the BAE SystemsInc. tank factory in York, Pa., for the past quarter century. He operates an overhead crane at the plant while his wife works a desk job there.
Mr. Edsall is worried that the company's business will dwindle if the scheduled spending cuts occur.
"Hopefully they'll get off their duffs down in Washington and get it straightened out," he said.