If you listen to the pundits, you would believe that the fiscal cliff is a financial Armageddon that awaits us. More homes will be lost, the stock market will crash and our fragile recovery will come to a screeching halt while unemployment skyrockets.
While it is being debated as to how the tax rates will look for 2013, there is one thing that is certain, your take-home pay will decrease. One of the "Tax Cuts" that is expiring and is not up for debate is the temporary reduction of the FICA withholding tax. In 2011, it was reduced from 6.2% to 4.2%.
This alone could trigger a recession, although not a major one if cooler heads prevail. It, however, could be a double whammy. In looking a dollars and cents, here is how it would play out for the "Average Joe Taxpayer". Again, the rest of story will come later as the debate goes on about those making over $250K and what government programs will cut. Those could have even more of an impact, but this is just about the FICA tax "increase".:
In this case, we are looking at a married couple getting paid twice a month.
If each person is making $30K a year, the decrease in take home pay will be $100 per month.
If each person is making $40K a year, the decrease in take home pay will be $135 per month.
If each person is making $100 a year, the decrease in take home pay will be $333 per month.
Most of us make life-style choices based on monthly take-home pay. A drop of $100 per month would make most of us look at where we can cut to offset that loss of income. To some it may be giving up a gym membership or discontinuing premium cable. But to others, it may require more drastic decisions. This could be to forgo insurance, move to a cheaper place, or cut back on meals and medications.
The impact here would be on things that require a monthly outlay. At the very least, gym memberships, premium cable channels, and "Fill in the Blank" of the month clubs. At worst, it will affect automobiles, new home mortgages (although a lot of people will try to refinance to reduce their mortgage payments) and retirement funding.
This is the first whammy. The second, possible, whammy would happen like this:
Some people, upon receiving their first paycheck of the year, will run down to HR to have their Federal Income Tax withholdings changed so that their take-home pay is what it was before the increase. The result here will be felt a year later, when the tax returns are filed. Here is what will happen:
$100 per month translates to $1,200 per year.
$135 per month translates to $1,620 per year
$333 per month translates to (roughly) $4000 per year
This will result in a reduction in tax refunds (or an increase in the tax bills) at tax time. Tax Refunds, for better or worse, are often viewed by some as an excuse to shop (that of course is a subject for another posting). Case in point: I remember Valentines Day, 2009 being at a Costco with my husband. We saw a number of people buying Flat Screen TV's. My husband asked me, if the economy is so bad, how could people buy such things. I looked at my husband and said "Tax Refunds". That year, they were larger than usual due to losses incurred in investments and businesses.
The impact here will be felt in items that people spend their tax refunds on. This would include large ticket items including Flat Screen TV's, appliances, furniture and vacations. If cooler heads prevail, and people resist the temptation to "adjust" their take-home pay, this whammy could be avoided.
In any case, just this small tax increase will cause all of us to tighten our belts.
As we wait to see what else happens, whether it is the additional Alternative Minimum Tax or an across the board tax increases, this is the given.
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