I attended a webinar about the impending doom of the fiscal cliff last month. There was a lot of dry and boring conversation about dividends, capital gains, and gift taxes. It probably would have been more interesting if Montgomery Burns from the Simpsons© explained what the fiscal cliff consisted of.
As I listened, I noticed that this cliff seemed to only affect those that are well to do, or rich. My client base is consists of working, middle class families and entrepreneurs. My clients are more concerned about how they are going to pay college tuition for their kids, not harvesting capital gains.
As I prepared to write this blog post, I reviewed my notes and realized none of the information was extremely vital to my client base. I literally had to ask myself “What the f$%& was the fiscal cliff anyway?” Here is what the media should have told you about the fiscal cliff instead of scaring you.
The Fiscal Cliff in Plain EnglishThe fiscal cliff primarily affects those who have a huge stake in the investment community. The “cliff” consisted of a combination of tax increases and spending cuts that were created to offset tax cuts and spending increases approved by George W. Bush during his presidency. See the components above. President Obama wanted to let the Bush tax cuts expire for the rich folks, raising $1.4 trillion over 10 years. If a compromise was not reached, the economy would have gone into another recession in my opinion. The opinions of economists, policy makers, and other yahoos said If the problem had not been solved, the economy could have gone into another recession by .5% or expand by 2%. Sounds real convincing, right?
How the “crisis” was “solved”
So the last 3 weeks, the President and the House have been arguing about who needs to pay more taxes. In the end, the President won. Higher taxes will be imposed on households making more than $450,000 each year, which represents about 2% of all taxpayers. But the Social Security tax will go back to its original rate of 6.2% (12.4 for the self-employed). The compromise bill signed by Obama will keep middle class families from paying alternative minimum taxes (an additional income tax for those who deemed to be rich by the IRS) permanently and saving these families about $3,000. It was supposed to be a win-win for all. It is estimated that households earning between $500,000 and $1 million will see a tax increase of $15,000, and those over $1 million it would be about $170,000. In comparison, the social security tax increase will result in a tax increase between $1,000 and $5,000 dollars for middle class families.
But this bill has apparently left some loose ends. The ever rising deficit was not addressed. There are spending cuts that were delayed that will come into effect to the tune of $110 billion and the credit limit of America’s credit card has to be increased again. Haven’t I heard this BS before? I do not remember the deficit ever being solved or addressed since I was able to vote (2002). Honestly I did a better job of balancing the budget using Wall Street Journal’s Make Your Own Deficit Reduction Plan tool.
The Moral of the Story
The middle class is paying a little more taxes, instead of a lot more taxes. The rich are paying significantly more in taxes, instead paying at middle class tax rates. The US government spent more than it brought in…AGAIN. I am certain policy makers will find a new crisis that will scare the public within a few months. So I anticipate asking my question again: “What the f$%& does that have to do with me and my clients?”
Jéneen R. Perkins is a freelance accountant and consultant serving entrepreneurs, families and small businesses. She prides herself in being fluent in English instead of “Accountant-ese”.
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"Putting My Money Where My Mouth Is" is a journal about real life experiences and answers to tough tax questions posed to Jéneen R. Perkins, Owner of Eclat Enterprises, LLC