Thursday, January 3, 2013

We Have a Fiscal Cliff Deal

It had to happen. If it didn't, the sun might not have risen. Perhaps it's what the Mayans anticipated so many years ago -- the fiscal cliff. Well, through the last-ditch efforts of Congress (you do know that a collection of baboons is called a congress, don't you?), we have 157 pages of legislative contortion that keeps the country from plunging off that cliff.

Who gets helped? Who gets hurt? Well, they say that if nobody is happy, then there really was compromise. In this particular case, the compromise was a combination of tax cut extenders and a few spending cuts. Most of what's in the bill doesn't matter to my typical reader. In fact, most of it doesn't apply to any reader that I know. But, since you're here and reading, I'll let you in on a few things that might.

  • FICA taxes (the OASDI part) are going back up to 6.2% of pay up to the wage base. For those who are counting, that's a 2% additional tax compared to last year on the entire income of most working Americans. But, if we kept it at 4.2% of pay, Social Security was going to run out of money really quickly.
  • Most Americans have no increase in their marginal tax rates. Unless you are (depending upon your filing status) a single person with adjusted gross income (AGI) in excess of $400,000, a head of household with AGI more than $425,000, or a couple filing jointly with AGI exceeding $450,000, you still benefit entirely from the Bush era cuts in marginal income tax rates.
  • If you are fortunate enough to be a beneficiary of the estate of someone who is unfortunate enough to die, estate tax rates are higher than they have been the last few years, but not as high as they were prior to 2001.
These were all considered to be tax increases by those who were worried about counting tax increases versus spending cuts. But, then there's this beauty for people who are wondering where the spending cuts are coming from. The ability to convert traditional IRA, 401(k), 403(b), etc. accounts to the Roth variety has been made permanent, or at least until a future law makes this ability disappear. 

This is a savings? Of course it is. Readers of this blog know of my dislike for the required methodology used to score bills by the Congressional Budget Office (CBO). They look at the next ten years on a static economic basis. Since you have to pay taxes on the converted amount when you convert your Roth, and the taxes that you would have paid upon retirement on the traditional account would often have not been paid for more than years into the future, this is scored as a money-saver.

The message here is that when you read in the media that there are spending cuts in this bill, take it with a grain of salt.

Oh yeah, there are also tax cut extenders for some of the usual suspects: Hollywood, NASCAR, and green energy among them. 2013 is off to a rousing start.


  1. Hi John, (Fran here)

    I'm pleased you next paragraph explained the savings. I was at a loss.

    And lets not forget the millions that will be given to the largest Rum makers in the world. It seems our cliff dive was only softened by landing on Pork Bellies.

    I don't see how there was so much fervor over the debt and cutting spending. When the pork will do exactly what the GOP said they didn't want. Increases without backing. Hollywood to the tune of hundreds of millions!!

  2. Fran, thanks for reading and commenting. Yes, I could have written pages and pages on the pork, but that wasn't the point. Bills seem to get passed these days when crisis has already set in. Perhaps there were times in the past that were worse, but I cannot personally remember a time when our legislative process was so dysfunctional.

  3. John,
    I enjoy reading your blog. You are knowledgeable and unbiased. You have a way of phrasing your views that are understandable and digestible. I just keep losing the link.

    I was speaking to your explanation on the IRA/Roth conversion benefit.

    I have lived 56 years and my memories are the same as yours. It's humbling to put it nicely. Perhaps we need to minimize government if for no other reason, to remind them why they exist. To serve the people, the nation, and not themselves.

  4. Good article.

    Would you please direct me to more information about IRA conversion? I have two Traditional IRAs which I am about to convert. Pros? Cons?