Janet Novack, Forbes Staff
If Congress does nothing at all, more than $500 billion in tax hikes and $100 billion in defense and domestic budget cuts automatically kick in for 2013, sucking enough cash out of the economy to send the U.S. back into a recession, most economists believe. What’s more likely, says budget expert Stan Collender, is that a falling stock market will pressure the pols to reach a “fig leaf” deal in January that postpones most of the pain, but makes little progress on resolving fundamental disagreements or cutting the long term budget deficit. In February, Congress will face another deadline, when the debt ceiling needs to be raised. And at the end of March, a six-month budget resolution funding fiscal 2013 federal operations will run out, raising the possibility of a government shutdown. After that, any deadlines set in the January fig-leaf will kick in. And come October, there will be a new fiscal year budget for the pols to fight over.
Here are eight steps ordinary investors can take to protect their sanity and their finances while this all plays out.
1. Raise cash for short term needs. “Money people need in the next year shouldn’t be in equities,’’ says Davis. That’s always good advice, but is even more crucial now since, after a period of relative calm, stock market volatility is increasing. If you were planning on paying a spring tuition bill or replenishing a depleted emergency fund from stock sales, sell now— even if your income is modest and your tax rate on capital gains is unlikely to go up. (No matter what happens to the Bush tax cuts, in 2013 those with adjustable gross income exceeding $250,000 face a new 3.8% Medicare surtax on their investment income, adopted to help pay for ObamaCare.)
2. Adjust your budget for lower take home pay. Most recent news coverage has focused on the fight over whether to extend the Bush tax cuts for the rich and on the $3,500 in extra 2013 tax an average household will owe if all the tax cuts are allowed to expire. The $3,500 extra burden is unlikely ever to be felt—the Internal Revenue Service hasn’t yet published income tax withholding tables for 2013 and Treasury Secretary Timothy Geithner has the legal authority to issue tables that reflect what he believes the law will eventually be, assuming a deal still looks likely. But take- home pay for average workers will drop anyway, since a 2% Social Security payroll tax cut in effect for 2011 and 2012 is unlikely to be extended. (Republicans oppose the $115 billion a year break and Democrats aren’t fighting hard to keep it.) For a worker earning $50,000 a year, that ‘s an extra $1,000 a year going to Uncle Sam–or about $20 less per week in take home pay. Those earning at or above the maximum wage subject to Social Security taxes ($110,100 in 2012 and $113,700 in 2013) will see their or Social Security tax bite jump $2425 in 2013.
3…And possibly a later (or smaller) 2012 tax refund. Most of the automatic tax increases would take effect on Jan. 1, 2013. But an alternative minimum tax “patch” that keeps 30 million additional families from owing AMT actually expired at the end of 2011, as did deductions for teachers’ out-of-pocket classroom expenses, higher education tuition and fees, and state and local sales taxes. Congress is likely to renew the AMT patch retroactively for all of 2012—and the IRS has programmed its computers assuming the patch will be adopted. But if the AMT patch issue isn’t resolved very soon, as many as two thirds of the 150 million households that file returns might be unable to do so until March, IRS Acting Commissioner Steven T. Miller warned Congress in a December 19th letter. (Last year, by mid-March, the IRS had sent out 65 million refunds averaging $2,899. ) “The impact of delayed refunds on the economy should be considered as Congress continues to dally,’’ says Claudia Hill, president of TaxMam in Cupertino, Cal. “The vast majority of those impacted are people who spend the refund as soon as it hits their account.”
To get a rough idea of how your tax liability might be affected by the missing 2012 AMT patch, try out Intuit’s free TaxCaster calculator available here and at Apple’ s iTunes APP store.
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