Breakout

Sponsored by

3 Landmines in the Fiscal Cliff Fix

Breakout

It's probably fitting that one of the most loathed institutions on earth (Congress) speaks its own language. That way, by using their native tongue, lawmakers are able to refer to the just-passed fiscal cliff bill as "the biggest tax cut in history" and still keep a straight face. This optimistic characterization in "Congressionalese," if you will, comes as economic watchers like PIMCO's Bill Gross describe the exact same deal in plain English as "pathetic" and "a tax increase on 100% of Americans."

Technically, income tax rates that were set to go up were actually left alone, except for individuals and couples earning more than $400,000 and $450,000 respectively. Policy analyst Ed Mills of FBR Capital Markets says the new 154-page pact includes several hidden landmines that will immediately take a bite out of paychecks this year. Especially of note is a 2% bump in the payroll tax that will hit every taxpayer — not just the high-income households.

Related: Payroll Tax Cut Expiration Is a Bigger Deal Than You Think

"Now that we have a deal and have declared victory, the first paycheck that every American receives this year will probably be less than their last paycheck last year," Mills says in the attached video, referring to the expiration of the payroll tax holiday that will nudge the withholding back to 6.2% from 4.2%. By his math, it works out to about $40 a week for the average American worker or $2,000 a year.

At the same time, Mills says, many households earning far less than the much-talked-about $450,000 level will also be sending more money to the IRS this year as a (perverse) result of the "biggest tax cut in history." That's because the level of deductions is being phased out, he says, and taxpayers will "only get a percentage of the deductions they normally would" on items such as mortgage interest, charitable contributions and child tax credits. According to Mills, the phaseouts kick in around the $300,000 level.

And finally, a third tax landmine that is baked into "the largest tax cut in history" comes in the form of the new Obamacare Tax. It's a provision, Mills explains, that will carve all the way down to the "$200,000 to $250,000 income levels" via a new "surcharge on investment income." Instead of the 15% rate, he says, investment income above $250,000 will be hit with an additional 3.8% for a total of 18.8%, which is very close to the new 20% rate investors earnings above $400,000 must pay. "Everyone is going to get impacted" if they are in that bracket, he says. "There is no way around that surcharge."

Sorry to spoil your "tax cut" fantasies so soon in the new year, but you might want to plan a meeting with a tax advisor to figure out how to spend your windfall.

View Comments