The three major stock indices finished up for 2012 and continued to climb in the New Year as Congress passed a last-minute plan to avoid most of the so-called ‘fiscal cliff.?
The Congressional Budget Office estimates these measures will add $4 trillion to the deficit over the next 10 years, while raising $620 billion in revenue through a series of tax increases on wealthier Americans. The details include a 39.6% marginal tax rate, up from 35%, for individuals with incomes above $400,000 and married couples filing jointly who make more than $450,000.
The tax rates for others remain the same. Taxes on capital gains and dividends also increased to 20% for households over the $400,000/$450,000 threshold. The estate exemption was also made permanent at $5 million indexed for inflation; $10 million for married couples filing jointly.
Amounts over those thresholds are now taxed at 40%. In addition, the deal re-imposed limits on tax exemptions and deductions for those higher earners. For example, the itemized deduction limitation now starts at $300,000.
The 2011 temporary cut to Social Security payroll taxes was not extended, increasing them from 4.2% to 6.2% effective immediately.
The 2 percentage point increase means everyone will take home less each paycheck, which could impact consumer spending growth over the near term, according to Raymond James Chief Economist Scott J. Brown, Ph.D.
The passage of the budget deal signaled an end of the uncertainty that hovered over the stock market for months, although some business remains unfinished.
The plan failed to address the federal debt ceiling and postponed harsh spending cuts, setting up what could be another contentious battle in the months ahead as Congress reconvenes to address these issues. News from Washington will continue to make headlines over the next few months, but our focus should remain on long-term planning for 2013 and beyond.
This material was prepared by Raymond James for use by James B. Kruzan, CFP?, CRPC? of Raymond James Financial Services, Inc., member FINRA/SIPC.