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Washington Watch - January 16, 2013

113th Congress Begins with New Fiscal Issues

The 113th congress is just one week old and already three major fiscal issues are set to define the congress: federal government funding through FY 2013, debt ceiling increase, and sequestration cuts that were delayed in the tax deal through March 1, 2013. All three fiscal issues place enormous pressure on President Obama and House Republicans to avert the type of last-minute negotiations that were evident in the down to the wire avoidance of tax increases for middle and low-income earners. However, both President Obama and House Republicans have started posturing as to what they propose for addressing the fiscal issues and they couldn’t be farther apart.

Perhaps the most crucial of the three issues is raising the U.S. debt limit. Technically the U.S. hit the debt borrowing limit on December 31, 2012, however, the U.S. Department of Treasury has as its disposal several accounting gimmicks to delay the government from defaulting, all contingent on Congress passing a debt ceiling increase. President Obama has publicly stated that he will not negotiate on the debt ceiling, i.e. agreeing to budgetary cuts in order to raise the debt limit. House Republicans have not shied away from escalating the conversation, citing a government shut-down as a possible course of action in order to show the President they are serious about cutting the deficit in conjunction with a borrowing limit increase.

The U.S. Department of Treasury has stated that they have enough money to meet our financial obligations until the end of February, beginning of March. If a debt deal is agreed to, the President and Congress will immediately pivot to dealing with the funding of the federal government through FY 2013, currently the government is operating under a continuing resolution, which will expire on March 27th. Again, the fight over the federal government budget could spell a government shutdown. The budget fight will also have to address the $1.6 trillion automatic defense cuts known as sequestration.

In short, the tax cliff was just a preview of what Congress will have to address in the early months of 2013 and most likely, it won’t be pretty. With a real chance of a federal government shutdown, default by the U.S. government, and painful budget cuts that will weaken the economy further.

2013: Paychecks Will Be a Little Lighter

While Congress avoided hitting many self-employed Americans with higher income tax rates, those individuals making less than $400,000 and couples making less than $450,000 will see their income tax rates remain the same, all Americans will see their paychecks a little lighter in 2013 due to expiring tax holidays and two new health reform law-related taxes.

While addressing the individual rate captured most of the attention, Congress did address other expiring tax issues in their last minute deal, two of interest to the self-employed: the Alternative Minimum Tax (AMT) and the Estate Tax. In a bold move, Congress approved a permanent fix to the AMT, a tax mechanism that when created was not indexed to inflation. This meant that every few years, Congress would have to approve a “patch” to increase the tax threshold so that middle-income earners were not taxed at a higher rate. With respect to the Estate Tax, Congress made permanent the $5 million exemption level, indexed to inflation, while also allowing a $5 million lifetime gift to children and grandchildren.

However, with all of the talk about ensuring that the middle class and America’s small businesses were not hit with an increase in their tax liability, this is simply not the case. All Americans will see their tax liability increase in 2013 due to expiration of the payroll tax holiday (i.e. the Social Security tax), the increase of the hospital insurance tax (pulled from the payroll tax deduction), and the new unearned income Medicare contribution tax established under health care reform law.

No doubt the situation could have been much worse if Congress had not acted. Yet, for many of the self-employed working hard each and every day, the addition of new taxes will undoubtedly cause a few headaches in the first quarter of 2013.

Senate and House Small Business Committees Announce Members

Senate Small Business and Entrepreneurship Committee Assignments

Senate Democratic Committee Members (Majority).

Senate Republican Committee Members (Minority).

House Small Business Committee Assignments

House Republican Committee Members (Majority).

Democratic committee assignments are not available

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