If we fall off the fiscal cliff, retirees could face a 17 percent increase in their 2013 income taxes, predicts CFP professional Leon LaBrecque, a lawyer and certified public accountant.
LaBrecque weighed the impact of eight unpleasant financial problems he believes retirees -- and those on the brink of retirement -- are most likely to encounter as a result of the nation sliding over the cliff. He estimates the dollar impact and predicts the likelihood of Congress passing a solution.
He says that for retirees and those doing retirement planning, "The most dangerous one of all is the expiration of the Bush tax cuts because it changes everything."
Here's his list:
- Expiration of the Bush income and estate taxes ($246 billion impact). This will hit everyone who pays income taxes and anyone whose estate is over $1 million. The fix: Extend all or some tax brackets and extend the current estate tax limits. Probability of Congress taking this step: very high.
- Alternative minimum tax, or AMT, patch ($50 billion impact). This law was designed to extract money from millionaires who wiggled out of paying taxes. The AMT isn't indexed for inflation, so now it is hitting some people who make as little as $40,000. The fix: another patch. Probability of it passing Congress: very high.
- Sequestration ($109 billion impact). These federal spending cuts were mandated by Congress last year as part of a deal to raise the nation's debt ceiling. Social Security and Medicaid aren't affected, but Medicare Part D could get a 2 percent haircut, pushing up what Medicare recipients pay. The fix: new budget cuts. Probability of these passing: slightly above zero.
- Expiration of the payroll tax holiday ($115 billion impact). President Barack Obama cut payroll taxes by 2 percentage points to stimulate the economy. The fix: Extend the cuts. Probability of passage: slight.
- Unearned income Medicare contribution tax ($24 billion impact). This affects singles with incomes greater than $200,000 and couples with incomes greater than $250,000. The fix: Repeal the Affordable Care Act. Probability: subzero.
- Expiration of the debt ceiling ($300 billion impact). The whole world would feel the pain if the U.S. couldn't borrow. The fix: Raise the debt ceiling. Probability of passage: good.
- Doc fix ($15 billion to $22 billion impact). Physicians who treat Medicare patients will take a sharp pay cut. The fix: Adjust Medicare pay guidelines. Probability of passage: maybe. (Docs can afford good lobbyists.)
- Small-business and stimulus tax breaks ($27 billion impact). This involves a host of small tax breaks, including the individual retirement account charitable rollover, which allows people older than 70½ to make mandatory IRA withdrawals by sending the money directly to a charity. These donations aren't tax-deductible, but neither do they count as income, which could result in higher taxes on Social Security or higher Medicare premiums. The law expired last year, but some are still hoping it will be extended retroactively. Likelihood of passage: 50-50.