If President Barack Obama and lawmakers fail to reach a deal this month to avert a series of automatic spending cuts and tax increases, how much more will you need to pay in taxes?
It depends, of course, on how much you earn. But the nonpartisan Tax Policy Center estimates that the average American would see tax bills rise by $3,446 next year.
Taxpayers earning more than a $1 million will endure a $254,000 tax increase, on average, or about 11 percent of their income. Those earning between $40,000 and $50,000 will see a $1,700 tax jump, or about 4.4 percent of their income.
After-tax income would decline across all income levels, according to the Tax Policy Center.
The nation’s lowest earners would see about a $412 drop on average (a 3.7 percent cut in after-tax income), while the top 1 percent of earners would need to shell out an additional $120,000 (a 10.5 percent bite in after-tax income). Middle-class families earning between $40,000 and $65,000 annually would see taxes increase by about $2,000, leaving them with 4.4 percent less money to spend.
Why would Americans need to pay more in taxes? Because a series of tax cuts and tax credits enacted in recent years are set to expire Jan. 1. They are the tax cuts put in place during George W. Bush’s administration; a payroll tax holiday signed by Obama; and measures enacted as part of the 2009 economic stimulus that expanded the earned income tax credit and the child tax credit for working families.
Finally, more than 26 million mostly middle-class households for the first time may face the alternative minimum tax, or AMT, which could add about $3,700, on average, to tax bills. Congress has thus far failed to approve an inflation “patch” that expired last year and prevents millions of people from having to pay the tax.
But congressional tax aides said the Internal Revenue Service has advised Congress that trying to fix the AMT after the filing season begins in January would lead to processing delays of more than two months for nearly half of all returns — significantly postponing the delivery of refunds.
Bottom line: If Congress doesn’t act, most Americans are likely to pay more next year in federal income taxes.