The 'fiscal cliff': It will hit your wallet

Published: Saturday, Dec. 29, 2012 - 12:00 am | Page 1A
Last Modified: Saturday, Jun. 15, 2013 - 10:43 am

Enough to make a year's worth of payments on a small car. Enough to take a weeklong vacation for two in Hawaii. Enough to feed a family of three for almost six months.

That's the cost of tax increases for middle-class families in Sacramento and elsewhere next year if the government goes permanently off the so-called "fiscal cliff."

The fiscal cliff is a series of tax increases and spending cuts that will go into effect on Tuesday unless Congress and the president agree to stop some or all of them. The nation's leaders created the cliff during a previous fiscal crisis as a way of motivating Democrats and Republicans to agree on reducing the federal budget deficit.

A Sacramento family earning the median household income for the region – about $55,000 – would likely pay an additional $2,200 to $3,500 in taxes next year if the cuts and taxes go into effect, according to the nonpartisan Tax Policy Center.

The full extent of those tax hikes wouldn't be felt unless all of 2013 passed without a deal. But each day without an agreement makes it more likely that families will have to cough up at least a little extra to the federal government.

"Even if they work something out, most people agree that taxes are going to increase," said Cynthia S. Myers, a certified financial planner based in Sacramento.

The cost of the fiscal cliff for local families will depend on their income level; whether they have children; whether they have a job; whether they have investment income; whether they are married and, most importantly, when – or if – leaders agree to mitigate some of the consequences.

Congress and the president could reach agreement early next year and make the terms of their deal retroactive, erasing or greatly reducing the cost of planned tax increases. Or they could argue long enough that retroactive action isn't feasible.

"It makes it very difficult to plan for 2013," said Terri Davis, a Sacramento-based certified public accountant.

A few elements would bite quickly if Congress doesn't craft a deal.

Since early in the recession, the federal government has taken 2 percent less from wages in payroll taxes used to fund entitlement programs such as Medicare and Social Security. On Jan. 1, that cut ends, forcing a family with $50,000 in annual earnings to pay about $1,000 extra in new taxes during the year.

Another near-immediate effect would occur when about 400,000 Californians stop receiving unemployment checks, according to the state Employment Development Department. These are people who have collected unemployment checks beyond the standard 26 weeks.

Also, many more people, including thousands of local middle-class residents, will likely have to pay something called the alternative minimum tax, or AMT, if Congress does not act soon.

The AMT was designed to make the wealthy pay a minimum amount in taxes instead of using deductions to whittle their bill down to a piddly sum. But, without a congressional fix, many more people who take deductions will pay the AMT on their 2012 income. Congress would have to act fast to stop that from happening, because people start filing tax returns in January.

"That could be significant," Davis said. "It could even affect people with around $45,000 in income."

If there isn't a deal by the end of 2013, nearly every household will see income tax rates rise to levels last seen in the 1990s. Those with children will likely see smaller tax credits. Those with investment income will likely pay higher capital gains taxes.

Jorge Reyes, a 39-year-old, part-time support-service caregiver, doesn't want any of that to happen. He makes about $1,200 a month – and says he needs every penny to make ends meet.

"We're all struggling right now," said Reyes, a lifelong Sacramento resident. "It's going to get worse."

Stan Cray, a 45-year-old mechanical engineer, has two children and didn't like hearing about planned reductions to child tax credits.

"I'm just trying to make it as it is," said Cray, who lives in Sacramento. "With extra taxes, it wouldn't be good at all."

Matt Haney, executive director of the University of California Students Association, said he is concerned about the expiration of a tax credit for families that provides up to $2,500 per college student.

"Students have been squeezed and squeezed in California for the last few years," he said, adding that the expiring credit "could impact an estimated 1 million taxpayers."

Beyond tax consequences, lack of a deal could hurt the regional and national economy. The nonpartisan Congressional Budget Office cautions the results could lead to another recession, which would affect everything from employment to real estate in the Sacramento region.

The spending cuts would also hurt. Much of those cuts would focus on the defense industry, and Sacramento is within an hour's drive of two large military bases. Expiring tax credits for research and development would be felt heavily from Folsom to the Bay Area. And tens of thousands of federal workers who could be affected by cuts live and work in California.

"We have a lot at stake," said Linda Sánchez, a Democratic congresswoman representing part of Los Angeles. "If (spending cuts) go into effect, the results are going to be really devastating."

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