What happens after going over the cliff

28 Dec

fiscal-cliff02-sizedThe bad news…

Going over the cliff could create problems that no one should have to deal with, simply because Congress and the White House couldn’t get the job done on time.

Practically speaking, there is likely to be a grace period of a couple of weeks during which Congress could pass a deal to ward off the bulk of scheduled tax increases and spending cuts.

And there are ways both may be postponed temporarily while lawmakers work that out.

Your paycheck…

If you’ll be paid during the first week in January, your company’s payroll processor will probably be cutting your check during Christmas week.

So far, the IRS hasn’t told the payroll companies how much tax to withhold for 2013 so the amount may look the same as the last one..

But your paycheck still could be smaller, because the 2% payroll tax holiday is running out.

Starting in January, workers will once again have 6.2% of their wages up to $113,700 withheld to pay for Social Security, up from the 4.2% rate that’s been in effect for the past two years.

That means if you make $50,000 a year, you might get about $83 less a month in your paycheck.

Someone making twice that would see their pay cut by roughly $167 a month.

If you’re getting a bonus, if those things still happen, you’ll probably lose there, too.

That’s because there’s one supplemental withholding rate that applies to bonuses. This year it’s 25%, but it’s going to jump to 28 percent on January 1st, unless Congress decides to change it.

For paychecks that will be cut during the second, third and fourth weeks of January, payroll processors will likely continue to use 2012 income tax withholding tables if they’ve heard nothing from Treasury and the IRS by that point.

There also is some debate whether the Treasury Secretary will have the authority to tell employers that they should continue to use the 2012 withholding tables until further notice if he chooses.

The other option, of course, is that the IRS could issue new withholding tables reflecting 2013 law, which means everyone’s tax rates will go up officially on January 1st.

In that case, paychecks that are processed in January will have more withheld than they do currently.

If, as expected, Congress eventually chooses to extend the Bush tax cuts for all but the highest earners, adjustments would need to be made for paychecks that went out earlier in the year.

As for your 401(k) and IRA – there’s no telling how markets will react if fiscal cliff gridlock persists into 2013.

Your 2012 tax return…

Here’s where things could become a dumb mess.

The IRS warned Congress that if it doesn’t act to protect the middle class from having to pay the Alternative Minimum Tax for tax year 2012 by December 31st, up to 100 million taxpayers may not be able to file their 2012 taxes until late March.

That would mean your refunds will be delayed and you won’t be putting those refunds into the economy during the first quarter of the year.

Retailers will feel that – big time.

There’s more…

Unless Congress stops the so-called sequester, a series of automatic cuts will reduce the budgets of most federal agencies and programs by 8% to 10%.

But that doesn’t necessarily mean those cuts would have to happen immediately.

Both the White House budget office and federal agencies have some latitude to postpone the cuts from occurring for several weeks if necessary.

Also, without stopping going over the cliff, Medicare physicians are facing a nearly 27% cut in their payments for treating Medicare patients.

But here again there may be a few weeks’ grace period for Congress to change its mind and reverse the cut.

That’s because a claim submitted usually takes two weeks – or more – to be paid after it’s received.

If you’re on unemployment…

You’re screwed.

A federal extension of unemployment benefits is set to run out.

If Congress does not renew it, people who lost their jobs after July 1, 2012, will only receive up to 26 weeks in state unemployment benefits, down from as many as 73 weeks in state and federal benefits that have been available in 2012.

As a result, more than 2 million of the long-term unemployed will run out of benefits in January.

If Congress chooses early next year to keep the extension in place, and makes the extension retroactive, then many of the 2 million who fell off the rolls may be paid retroactively.

Can all this go away before next week?

Speaker John Boehner is calling the House into session on Sunday.

Our guess at the outcome?


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