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Retirement hangs on fiscal cliff

By Jennie L. Phipps · Bankrate.com
Monday, November 12, 2012
Posted: 1 pm ET

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.)
  8. 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.
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105 Comments
Cher H
November 17, 2012 at 12:25 pm

I totally agree with Don S and Mary S above. This country needs a revolution to overthrow our present, sickening government. Getting rid of the two party system would also be a good start. All they do is bicker amongst themselves, and we, mainstream America, pay the price. Congress and the president should have to live like the rest of us and have the same rules and laws as the rest of us. If that happened, we would see how fast the laws would change, for the better, with taxes, health care, pensions, Medicare, etc. They are in their own cocoon, there on Capital Hill, living off OUR money and nothing they pass laws on affects them. WHY do we put up with this and all the corruption that goes on? All we do, as mainstream America, is gripe to each other about the unfairness and say there is nothing we can do about it. Sure there is...we can band together and start a movement to get this country out of its shameful state of greed and back to the American pride in our country that seems to be long gone. I, for one, am totally ashamed of our country. We have out-sourced our factories, we give handouts to people who don't qualify for them, our debt is pretty much beyond repair, and we are leaving an America to our children and grandchildren that is in such disrepair that it will take decades, if that, to fix. I NEVER thought I would live to see the day that America would become a cesspool of greed and dog eat dog, but we have elected the officials who are among the worst of them.

Cathy H
November 17, 2012 at 11:42 am

Does no one realize that if the rich are taxed more they will not take the hit, they will just filter it down to the middle class in lost jobs, higher price on goods or cut benefits? The rich stay rich. Thanks to "Obama Care" there is now a federal tax that will have to be paid on the sale of any house after 2012. Like the sale of homes is not causing the seller to take a big enough hit with the falling house values, now you will have to pay a federal tax (never in history) and loose more money. Taxes are hidden very well and the impending "fiscal cliff" just adds to the burden of the American people, not the politicians.

Mary S
November 17, 2012 at 11:08 am

It's a sad society when everyone wants to sit back and take money from someone who worked hard all of their life. I would not feel good sitting around and picking someone else's pocket. I do not consider my initiative to be greed. I consider that working for a living. Hey Mike.....What do you call what you are doing? Why do you feel that you are entitled to part of someone else's money if you did not work for it??? I'd really like to know since I was brought up to work for what I have....and if I did not have the money, I did not buy whatever it was...

Jim P
November 17, 2012 at 10:59 am

Dividends within the 401K or IRS are not taxed like regular dividend stocks. Only money withdrawn from a 401K or IRA is taxed and it is not specified as dividend income. If you own dividend stocks outside a 401K or an IRA and you will be taxed probably at 16% if tax break or 10% expires. I hope they extend this tax break for dividend income but limit the amount of dividend income claimed. For a most people a limit of $50,000 income from dividends would be fine. It is the people paying 10% on several million dollars in dividends that seems out of line.

Mike Leahy
November 17, 2012 at 10:52 am

to Mary S: You sure are worried about your investments getting taxed. Capital gains are income and should be taxed. I'm one of those freeloaders who go month to month. It is very hard for me to feel sorry for someone like yourself. You are greedy and have no feeling for anyone but YOURSELF. Gotta go now.....80 hours per week sitting on my lazy ass is very tough.

Octavia Emanuel
November 17, 2012 at 10:41 am

I can spot a bigot and a yuppy 10 miles away. period

Bob
November 17, 2012 at 10:38 am

Mary S. Wake up, the GOP is not and never has been a friend of the middle class. Obama needs to call their bluff or the rich will continue to cruise down easy street! If Reagan hadn't started the war on the working class we would all have guaranteed pensions, but no, he and his rich buddies wanted to suck us in to the market.

Mary S
November 17, 2012 at 10:29 am

Sorry I got off the subject a bit. I am almost 63 and have worked since I was 16....Sometimes 2 jobs. I worked full time and earned a BA and MBA at night. Then I was a consultant and worked 70 to 80 hours a week. Most of my $ is in dividend stocks and hoped to live off my dividend payments. If this increase in taxes goes through, most retirees will be hit hard like me. Look at our 401Ks....They are all in dividend accounts!!! How are we to survive with this huge increase? Obama thinks that only the rich invest in stocks but all retirees' 401Ks are in dividend bearing accounts??? What is he thinking???

Mary S
November 17, 2012 at 10:18 am

Why is it when we say we do not like Obama, someone always says that we are bigots???? We are simply against his policies. He is leading the US down a socialistic path which is totally against our Constitution. Big government, huge pensions for government workers, and handouts for those who would rather sit on their XXX and collect money when they do not deserve it, etc. Since over 45% of the population gets some type of help from the government, none of them want to give up their handouts. Some are valid but many today are not and those are the people who got him elected. Soon there will NOT be sufficient numbers of people to tax so we will NOT be able to provide these government handouts. Then we will be like Greece where this is exactly what is happening. What happened to our capitalist society? Obama wants to get rid of it and replace it with socialism and I and ALL of my friends, do NOT want this at all. Obama is great at saying that we all knew what we were getting when we voted from him. I did not vote for him and according to the popular vote, he won by a small margin. Just look at what the stock market did when he won. His policies are not good for our country and we are now in worse shape and will continue to be so until he is out of office or unless he gets off his socialistic agenda.

Don S
November 17, 2012 at 10:15 am

Congress is running the country, not the President. They don't work for the people, the work for their peers. They have their own retirement plan. It's nothing like working for a few years as a Congressman and receive a pension. Nothing like voting to put money in your own wallet. It is getting more sickening everyday.