The over-focus of the news media on the ‘Fiscal Cliff’ during the holidays and their subsequent celebration of the agreement struck by Congress, the Senate and the President was akin to thanking an arsonist for putting out the fire that he had started.

Moody’s Rating Service stated that the agreement did nothing to put the United States on a sustainable economic path as it did not fix core budgetary problems or the dysfunctional process that consumes Washington DC.  These economic arsonists in D.C. will again consume media coverage over the debt ceiling and sequestration.  Sequestration is the process through which automatic budget cuts of approximately 7% occur automatically on March 1st in order to mildly address budget deficits that will near $1.5 trillion in 2013 or $4,500 per America.  This debt is on top of nearly $50,000 in debt outstanding per American at the national level.

Setting macro-economic issues aside for a moment, how did the New Year’s Eve deal impact you?

As you have probably noticed by now, your payroll taxes returned to 6.2% from the 4.2% level that had been in place for the last two years.  For every $1,000 you make, you are now paying an additional $20.

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As for your taxes, unless you make more than $400,000 or $450,000 if you are married, nothing has changed.  Those in the two lowest tax brackets will see capital gain and dividend taxes go down to 0%.

Good news to many is that the Alternative Minimum Tax will now adjust with inflation.  Also, if you are a teacher, you continue to get a $250 deduction for your purchase of school supplies from your paycheck.  For people who are older than 70 1/2 years old, they can continue to make tax-free charitable donations with distributions from their IRAs.

If you had to sell your home as part of a short sale or foreclosure, you will not have to pay taxes on the debt forgiven in the process.

A number of family tax breaks for low income families that were passed over the last four years are extended for an additional five years.  This includes tax deductibility on the first $6,000 of dependent child care.

Another part of the New Year’s Eve deal was the extension of $76 billion in tax breaks.   Most were meant to spur growth and innovation.  The deal included $14.3 billion for research and development with pharmaceutical companies benefitting most; $12.2 billion in tax credits for renewable energy; $11.2 billion exemption from taxes on the foreign earnings on for financial firms like banks; $9 billion in accelerated write-offs on capital expenditures and improvements for an assortment of industries including restaurants and retailers, and $314 million of enhanced deductions for companies that donate food to the needy and books or computers to local libraries.

With the Fiscal Cliff temporarily averted, get ready for Fiscal Cliff II.  The GOP will threaten a government shutdown in order to secure spending cuts meant to hold down the growth of the national debt principally through reductions in entitlement programs like Medicare/Medicaid for retirees and the poor.

The Obama Administration has a solution to the GOP tactic – issue a $1 trillion coin and deposit it at the U.S. Treasury.  This legal loophole may not be needed this threat negates the GOP threat.

As it relates to automatic budget cuts caused by sequestration, this discussion is complicated by pending legislation that will authorize $500 billion in relief and rebuilding related to Hurricane Sandy.

Given recent history, we should expect our economic arsonists to kick the can down the road on real budgetary reforms with the majority of these ‘forced’ cuts occurring closer to 2023 than 2013.

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