Fiscal Cliff Effect on Seniors: Higher Taxes on Dividends; Social Security Safe

Friday, 16 Nov 2012 08:57 AM

By Peter Moses

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The national media is abuzz with talk of the government falling of the “fiscal cliff” if Congress and President Barack Obama cannot come to some kind of compromise agreement before year’s end. Many senior citizens have some questions about how the fiscal cliff would affect their lives, savings and programs.

The "fiscal cliff" is shorthand for federal spending cuts and tax hikes that will automatically go into effect in on New Year’s Day unless Congress and Obama don’t make a deal.

How did we get into this mess?
The stage was set last year when Obama and Congress compromised to pass the Budget Control Act of 2011.

What was the compromise?
Tax hikes and mandated cuts. The tax hikes include ending the temporary reduction in the payroll tax, which funds Social Security for one. It would end some tax breaks for businesses, affect the alternative minimum tax, and start new taxes to start paying for Obamacare, officially called the Affordable Care Act. They will also affect certain tax credits for college tuition and low-income families.

That sounds dreadful. Any more cuts?
The White House has proposed budget cuts that will affect over 1,000 government programs, including $55 billion in defense cuts and $11 billion in lower Medicare payments.

I am retired, and for the most part, my income is consistent. How will that affect me?
Let’s start with increased dividend taxes. Retired people who receive income from their stock and mutual fund investments now pay a maximum rate of 15 percent. If the government enacts these changes, dividends will be taxed at ordinary income rates, up to 40 percent.

How about capital gains?
The maximum tax rate on long-term capital gains will rise from 15 percent to 20 percent. That may not sound like much but when adjusted for inflation it means you could lose some purchasing power.

How about my social security?
Actually, the news is good on social security. Your benefit will not increase but the fiscal cliff ends the 2 percent payroll tax "holiday" put in place by Obama in 2010. Since the payroll tax funds Social Security, that money won’t be deducted.

What about Medicare?
Medicare will lose $11 billion in funding, partially by paying doctors less for their services. You might have to make up the difference. The ripple effect could cause some medical facilities to cut staff, lowering services in the process.

What about home values?
Anything that results in less government spending, lower employment numbers and a diminished economy doesn’t help prop up home values. People who might have moved up a notch in the housing market might not be able to afford to.

I heard Meals on Wheels might be impacted
Donna Yee, chief executive officer of a California Meals on Wheels program told a local television station that 200 seniors would be cut from the program if these federal cuts came down the line. She said 90 percent of funding for the program came from the federal government.

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