US Households Face $3,446 Tax Increase From 2013 Fiscal Cliff

U.S. households are facing an average tax increase of $3,446 in 2013 if Congress doesn’t avert the so-called fiscal cliff, the nonpartisan Tax Policy Center said in a study released Monday in Washington.

The top 1 percent of households face some of the largest tax increases and would see their average federal tax rates hit 40.5 percent, up 7.2 percentage points from this year. That would translate to an average tax increase of $120,537.

About 88 percent of U.S. households would see their taxes increase in 2013, with a typical middle-income household facing a tax increase of about $2,000.

After the Nov. 6 election, Congress is scheduled to return to Washington to debate the automatic spending cuts and tax increases starting in January unless lawmakers act. For calendar year 2013, taxes would increase by $536 billion, or about 20 percent.

“This is a very large tax increase,” Donald Marron, the center’s director, told reporters in Washington.

If Congress does nothing, tax rates on income, capital gains, dividends and estates would increase, and the alternative minimum tax would spread to 21.7 million households, up from 4 million this year.

The top statutory tax rate on ordinary income would reach 39.6 percent, up from 35 percent, and the top rate on capital gains would be 23.8 percent, up from 15 percent. A 2 percentage point payroll tax cut is set to expire at the end of 2012.

Income-Tax Cuts

Lawmakers agree they should extend the income tax cuts for most households. Republicans want to keep all the income and estate tax cuts for 2013 and begin overhauling the tax code. Democrats, including President Barack Obama, want to let most of the tax cuts lapse for the top 2 percent of households, or individuals making more than $200,000 a year and married couples making more than $250,000.

Each piece of the fiscal cliff has varying effects on people at different income levels. Low-income households have the most at stake in expiring expansions of the child tax credit and earned income tax credit. Middle-income households are affected most by the payroll tax and income tax.

According to the report, households at the top of the income are most affected by the income taxes and the tax increases on unearned income such as capital gains that were enacted in the 2010 healthcare law and take effect in January.

“If investors really believe that the tax rate they face on capital gains is about to go up significantly, some of them will choose to realize accumulated gains this year rather than next year,” Marron said.

The Tax Policy Center is a joint project of the Urban Institute and the Brookings Institution.