So in 5 days we collectively go over the fiscal cliff.  Now – let’s look at what this REALLY is going to be as Obama, Reid, and Pelosi lick their chops as to how bad the Republicans are going to look.  But they are worried more about the country than politics, right?  Maybe not. 

The Dems continue to parade around like a proud peacock – holding to “give me what I want and we’ll have a deal.”  Even with the bi-partisan defense bill that just passed the Senate today by an 81-14 vote.  The White House has threatened to veto.  http://news.yahoo.com/congress-completes-633b-defense-bill-203351297.html 

But it’s a Republican issue.  I digress…. 

What does the fiscal cliff really look like?  Let’s take a look at where it really hits home.

Your paycheck will go down by at least 2% due to the expiration of the social security payroll tax holiday.  It went down from 6.2% withholding rate to 4.2% withholding. 

The expiration of the “Bush” tax cuts will raise the tax rates for everyone.  Obama threatened veto and Harry Reid said he would ignore the bill if it passed the House.  He’s done quite a bit of that in the last couple of years – especially when it comes to money matters.  Reality is that the Senate hasn’t passed a budget in 4 years now. 

Bottom line – expect another 3 to 5 percent to come out of your paycheck every week and headed to Uncle Sam.

Don’t believe this BS that “they can make it retroactive”.  It’s not a false statement, but let’s say they reach an agreement in March.  Your payroll withholdings will change, likely on February 1.  The IRS has not released the withholding schedules yet and January will stay the same.  After that -  You will have 3 to 5% taken out of your paycheck every week until a deal is reached.  Sure – you will get it back NEXT April when you file your taxes.  You will have had more withheld than you needed and will get your FEDERAL withholdings back.  If they extend the Social Security withholdings, that will have to be figured out.  Don’t expect to see that 2% back though.  That has nothing to do with your tax refund.  Beyond that – if no deal is reached?  They will withhold MORE so they can make up for the lack of withholdings from January.  Think I’m being extreme?  Do a google search. 

 Speaking of Taxes and what we all have to do starting in January.  Or does it start in January??? 

Right now, the IRS is not accepting returns until January 20^th.  That’s about a week later than normal.  BUT with the fiscal cliff negotiations going nowhere, it’s predicted by the IRS that two thirds (2/3) of American taxpayers – 100,000,000 people won’t be able to file until MARCH!!  Why?  The IRS has to update the forms and the software which takes between 4 and 6 weeks.  The forms have to be approved by congress.

 Right now, a few things that are at stake are unreimbursed employee expenses, child care credits, educator expenses (the deduction that teachers get when they spend their own money for materials not provided in the classroom), and the Alternative Minimum Tax (AMT). 

Ultimately, if you itemize your deductions over the standard deduction – you can’t file.  Unreimbursed employee expenses are filed on Schedule A – which is also where you deduct your mortgage interest, your state income taxes, etc.  This form won’t be finalized. 

Teachers?  You won’t be able to file unless you want to give up your credit of $250 and you are single or married with no kids.  The form won’t be done. 

Have kids and get Earned Income Credit?  You won’t be able to file.  That goes on 1040 long form or 1040A.  Not a 1040EZ – single or joint filers with no dependents.  1040 long form won’t be finalized – nor will 1040A (remember the educator deductions?).  Don’t plan on using that money for anything anytime soon.  Probably not coming until April now.

I know I was looking forward to my refund in February.  Looks like we might have to wait until mid-April with the way things are going.  Don’t worry – the IRS so far hasn’t changed the April 15^th deadline – so no pressure to get your taxes done.  You will have a few weeks to get them done, rather than a few months. 

Keep holding that line Mr. President, Mr. Reid, and Mrs. Pelosi.  You say you are for the working class – but by not even considering the compromise of taxing Millionaires and Billionaires as you say (which apparently starts at $200,000) you are screwing all of us.  Especially those that really need it.  Single mothers that get EIC.  Working parents that get EIC.  They can’t file their taxes. 

I’ve said it many times – unintended consequences.  Looks like it is better for President Obama to hold campaign promise this time than it is to really do something for Main Street. 

Let’s take this a step further.  As Pelosi has said – lower income people spend the money right away and it puts money into the economy.  Now, it’s better to hold of people getting money in February and delaying it until April.  So – the money that is typically infused into the economy in February and March will now be delayed until April and May.  Everyone now see where I was coming from with my predictions of another recession? 

Let me clarify if I’ve lost you.  Lost money from paychecks, lack of tax refund money?  No spending.  No spending – no goods to produce, and no reason to keep on store employees.  All seasonal help let go (usually some stay on – a few will, but not like normal).  More lost income.  Less spending.

 I’ve said before and will say again – 12/21/12 wasn’t the day of Armageddon.  1/1/13 will be the fiscal Armageddon for the everyday taxpayer.  We’re screwed.  Nobody wants to see it, but I don’t have the Obama rose-colored glasses on either. 

 I didn’t even address the Obamacare taxes that hit this year…..even more coming in 2014.  That’s going to be a lot of fun.

But don’t blame me – I didn’t vote for Obama or Cap’n Corrupt Visklosky. 

Since I know some will say that I complain, but don’t offer a solution – I’ll offer a solution.  Let me present the DickieH Tax Plan.

1. Capital Gains – remain at 15% Long Term, 28% short term.  Encourages investment and allows some tax income on initial dollars that were already taxed.  Just because you made a good investment, you shouldn’t be penalized.  Capital losses - $3000 carryover for 5 years.  Currently unlimited.  If you are a dumbass and invest poorly, you shouldn’t be able to carry these over forever as it currently is. 
2. Social Security Payroll tax –
1. Stays the same for 2013
2. 0.5% increase in 2014
3. 0.5% increase in 2015
4. 1% increase in 2016 (economy dependant – alternate to lower to 0.5% 2016, 0.5%2017)

Better to increase gradually than snatch 2% out of workers paychecks effective immediately. 

 

5. Increase 0.5% in 2017 (2018 if alternative is enacted) – more retirees, means more expense.  We have to do this in order to fund just the obligations.
6. Maximum income cutoff is raised by $10,000 per year (adjusted for inflation) from 2014 through 2034.  Currently at $161,000. 

HOWEVER – Effective in 2015 we enact the Paul Ryan proposal for those under 55 and allow an option to go into the private market – essentially creating a 401K for social security.  Those choosing to go into the Social Security IRA can invest half of their own payroll withholdings, the rest goes to traditional Social Security.  Of that invested, half is required to be in safe investments (Governement bonds, money market, etc.) while the rest can be invested in US companies.  No foreign accounts.  No risk limitations on the last quarter of investments – but must be in US companies.

3. Tax rates
1. Rates stay the same for those under $1 million (trying to garner bi-partisan support, stick with me here though…)
2. Child Tax Credit

                                                              i.      Limited to 5 kids in 2014

                                                            ii.      Limited to 4 kids in 2015

This credit is currently unlimited.  Thus the “buying and selling” of kids for tax purposes that we always hear rumors about.  It’s true.  It happens.  This cuts out the fraud from the tax code.  4 is plenty.  This is worth $1,000 per kid.  Sorry, but if you are Kate plus 8 or Octomom?  Your choice, not mine.  I shouldn’t have to pay for a tax credit for you.  Octomom gets $8000 for the Octuplets and $6000 for all the other kids – fully refundable.  Her tax refund likely starts at $14,000 given that she admits being on public assistance.  Public Assistance (TANF, etc) is not reported as income on tax returns.    

4. Education Credits – Keep the American Opportunity credit.  Keep tuition and fees deductions, keep lifetime learning credit, keep student loan interest deduction.
5. EITC – and this is a big one.
1. Keep the 3 child tables through 2014 – but they stay the same, reducing the amount of refundable credit available as wages rise through inflation
2. Keep the income levels the same through 2017.  As wages rise through general inflation, the amount paid out on this credit will decrease (this goes back to “skin in the game” aspect.  Currently, there are a whole lot of negative tax liability people in the country)
6.   Medicaid –
1. Set up Health Savings Accounts rather than current method. 

                                                              i.      Those with disability, not able to work at all and no earned income remain on current plan

                                                            ii.      Those under $5,000 per year remain on current plan unless they qualify for Earned Income Credit

                                                          iii.      Anyone receiving Earned Income Credit above the guidelines set forth – half of the Earned Income Credit will go into the Health Savings Account.  The rest will be refunded.

                                                          iv.      If in the case that someone is qualified for Medicaid and has health insurance through their employer, Half of the EIC will go to their Social Security savings account. 

7. Medicare
1. Raise the age of eligibility to the same as Social Security eligibility.

                                                              i.      Under 55 years of age goes to immediate match

                                                            ii.      56 – 60 pro-rated phase in depending on age (i.e. 65 age of eligibility - someone 60 years old would go up by a percentage of age vs. eligibility.  Actual numbers not yet calculated.)

                                                          iii.      60+ no change

2. Means test to receive
3. Raise withholdings by 0.5% in 2014.
4. Anyone 55 and under can opt into a Health Saving Account where half of their payroll withholdings for Medicare would go into their own account and could be invested.  Additional contributions can be made by the taxpayer with a tax deduction and disbursements are tax free if made on healthcare costs after the age of 65.  No early withdraw or loans. 
7. Inheritance Tax (death tax) – eliminated.  They were taxed.  No need to tax again.  Any capital gains from sale of assets are taxed at capital gains rates. 
8. Gradual shift to flat tax of 18% with the first $10,000 per individual on the tax return exempted ($20,000 Married Joint) with elimination of deductions.  To be completed by 2035. 

 

So there it is in a nutshell.  No, I won’t run for congress.