As we get closer to the possible fiscal cliff, people are starting to seriously look at how the currently scheduled tax increases will affect their personal bottom line if Congress does not act. I've done some calculations, and I reckon my family's tax bill will go up by half. If you haven't started to think about this, now is the time. It is a bit complicated, for many reasons. One, there are changes to numerous aspects of the tax code. Two, tax is calculated on a yearly basis, and you don't have your 2012 figures yet, so you can only realistically work with your 2011 tax calculations. A lot of things have probably changed since 2011, so those figures aren't a great place to start your figuring. However, we are going to try to estimate. There is no way this will be absolutely right, because there are too many variables, but some knowledge is better than none.
Gather Your Info
First, you'll need to know some thing about your family's tax situation. Check your Leave and Earnings Statement (LES), the 2013 Pay Charts, your 2011 tax return and any other places you need to find out:
- Your 2013 base pay
- number of children
- federal income tax filing status
- whether you itemize deductions or use the standard deduction
Start Doing Some Math
Get a piece of paper, and write the following list on it:
- Increase in Social Security Payroll Tax
- Decrease in Child Tax Credit
- End of 10% Tax Bracket
- Increased Tax Rates
These are the major categories of tax that will increase your overall tax bill. This includes things such as the expiration of the Higher Education Tuition Deduction, a decrease to the American Opportunity Tax Credit, and many others.
Social Security Payroll Tax
At least this one is easy to calculate! Take your 2013 monthly pay, and multiply it by .02. This is how much additional Social Security-FICA tax will be deducted from your pay each month. Even though it is not calculated as part of your federal income tax return, it is still a tax. Write this number on the appropriate line on your list.
Child Tax Credit
If you have children, you currently receive a generous, refundable tax credit of $1,000 per child each year. If no changes are made, this credit will be reduced to $500 per child for 2013. This means that you will be actually paying that $500 of tax vs. getting a credit for it. That equals $41.67 per month, per child, so take the number of children that you claim and multiply it by $41.67. Put the result on the appropriate line on your list.
Eliminating The 10% Tax Bracket
Under the currently scheduled tax changes, tax rates are scheduled to increase between 2% and 5%, at various levels of income. The most dramatic increase occurs at the lower end of the tax tables, with the elimination of the 10% tax bracket. This means that all taxable income between $0 and $35,350* (single) / $47,350* (head of household) / $70,700* (married filing jointly) will now be taxed at the 15% rate. For most of us, that's all our income. Eliminating the 10% bracket means the following immediate increase in taxes for people who make more than the figure listed:
| . | Married Filing Jointly | Single | Head of Household |
|---|---|---|---|
| Income in excess of | $17,400 per year | $8,700 per year | 12,400 per year |
| will pay an additional | $870 per year =
$72.50 per month |
$435 per year =
$36.25 per month |
$620 per year =
$51.67 per month |
Remember that we're talking about taxable income, which is after all the adjustments, deductions and exemptions have been subtracted. This is where looking at your 2011 tax return might be helpful, if your situation hasn't changed too dramatically. If it has changed, try to guesstimate.
If you make more than the amounts listed in the chart, write the number listed on the appropriate line of your list. If you make less than the amounts listed above, multiply your monthly income by .05 and add it to the appropriate line on your list.
Increase In Other Tax Rates
Does your family have taxable income in excess of $35,350* (single) / $47,350* (head of household) / $70,700* (married filing jointly)? For taxpayers who have higher taxable incomes, there will be an increase of 3% on your taxes. If you get into super-high income levels, it goes up even more, but there are very few military families in that income range. If you are so fortunate, you need to be talking to your accountant, not reading my ramblings.
Take your estimated taxable income and subtract the amounts listed in bold above. Then multiply that figure by .03, and put the result on the appropriate line on your list.
The Final Add-Up
Have you added up all the numbers on your list? This is an estimate of how much your taxes will go up if Congress does not act to change any of the tax laws. There are three possible scenarios for Congressional action, and each scenario can be applied to each change:
- Congress could not act on these, allowing the underlying tax breaks to expire and making these rates and rules the new law.
- Congress could extend the current tax breaks, or
- Congress could make changes that look like neither the current law or the old, returning law.
Very few people expect that all these changes are going remain as they are currently written. However, it is nearly certain that some of these tax increases will occur. Knowing what could happen is the only way to prepare for what will happen.
Please keep in mind that these are only the four major categories of change. There are also changes to personal exemptions and standard deductions, changes to the Alternative Minimum Tax, the loss of the Sales Tax Deduction, the expiration of the Higher Education Tuition Deduction, a decrease to the American Opportunity Tax Credit, and many others.
Also, remember that I am not a tax professional. I'm just super-interested in my family's finances, and I share my research with you. Please, please, see a qualified tax professional for details specific to your exact situation.
For more detailed explanations, please see:
The Fiscal Cliff: Your Taxes, Part One (Social Security Payroll Tax and Federal Income Tax Rates)
The Fiscal Cliff: Your Taxes, Part Two (Child Care Tax Credit and Alternative Minimum Tax)
