What New Tax and Regulatory Changes May Mean For You

All the squabbling in Washington over taxes and financial regulations may look like just another political game, but the decisions, or indecisions, made by Congress this year may have a significant impact on your bottom line in 2012.

Taxes

Payroll tax cut:

Congress is currently going back and forth over whether to extend this year’s temporary cut in social security contributions. The normal tax rate of 6.2% was slashed to 4.2% this year to help stimulate the economy (this applies to the first $106,800 of income earned). That 2% drop may not seem like a lot, but if your salary after deductions comes in at around $50,000, the cut has saved you around $1000 in taxes this year.

President Obama and the Democrats want to extend, and even deepen, the tax cut for 2012 to as low as 3.1%. The Republicans have been opposed to the tax cut due to budgetary constraints. Yesterday, Mitch McConnell (R-KY), the Senate minority leader, said that the Republicans do support the tax cut and see it getting through Congress before the end of the year. Extending the cut will cost the government $300 billion in revenue.

Bush and Obama tax cuts:

Don’t worry too much about this one. President Obama and the Republicans came to an agreement earlier this year to extend the controversial Bush-era tax cuts into 2012. The move will keep federal tax rates where they were this past year for all Americans, including the top 2% who earn more than $200,000 ($250,000 for couples). President Obama got a bunch of his tax cuts extended including: The earned-income tax credit, the child credit, the child and dependent-care credit and the tuition deduction.

The tax cuts are scheduled to end next year, but both parties have said they want to make the cuts for the bottom 98% of Americans permanent. That means big savings for most of us. If you make the median US family income of $55,000 a year, the Bush tax cuts, along with the Obama tax cuts, will save you around $2,700 in federal taxes next year. Of course, that means adding $4 trillion to the country’s burgeoning debt load by 2020, but no one really seems to care about that. Extending the tax cuts to the top 2% will cost the government around $678 billion in revenue by 2020. If the Democrats gain control of Congress and retake the White House this November, the top 2% will most likely see their tax rates jump in 2013.

Estate Tax:

The estate (AKA: Death) tax, which lapsed this year, will make a comeback in 2012, but it will have less bite than before. The taxable threshold on an estate has gone from $1 million to $5 million. That should eliminate the tax for the vast majority of Americans.

For a list of other major tax changes, take a look here.

Regulation

Bank fees:

Now that the government has made it harder for banks to charge you overdraft fees, expect them to try and make up that cash in other ways next year. It costs banks an estimated $349 a year to operate your free checking account, so they are now hemorrhaging money since they can’t stick you with a $40 cup of coffee for exceeding your balance.

Bank of America tried to levy a $5 month charge for its ATM-debt card users this year, but that became a total political fiasco, forcing the bank to retract the fee. Banks may institute “softer” fees next year, in which they would levy a charge quietly on existing accounts. So, they may institute a fee for accounts that don’t have electronic direct deposit or for accounts that don’t maintain a certain balance. While they need to inform you of these changes by mail, most people just throw those statements out. Any bank or credit card fees you are charged are highlighted by Mint.com. This helps you stay in control of your finances.

Consumer Finance Protection Bureau:

This new government agency (set up in 2011) will be making some changes to the way banks communicate with you regarding your credit cards, student loans and mortgages. The CFPB will force banks to follow a much clearer standard template when soliciting you for any of these debt packages under a program they call “Know Before You Owe.” You can see an example of the new credit card forms here. The government hopes the bold and clear template will help consumers make better choices.

The Fed:

The Fed promised this past summer to keep interest rates at 0% to 0.25% through mid-2013. The unprecedented move will ensure historically low borrowing rates for customers that have strong credit scores (have you updated your score on Mint.com lately?). That means lower interest payments on everything from mortgages, cars and even your credit cards. The lower rate only applies to new stuff, but you can refinance your existing loans (for a fee) to match the prevailing low rate.

Banks will probably be more comfortable giving out 0% interest credit cards next year, so you can transfer your higher interest credit card debt over to the 0% credit card to save on all that interest. Now, that usually means incurring a fee amounting to 3% of whatever you transfer over, but it may be worth it if you can score a low-interest credit card with a long-time horizon,

The Fed promised to keep rates low (affirmed today at a Fed meeting) to help stimulate spending and discourage saving. They believe that this will help jumpstart the weak economy. While that’s good news for shopaholics, it’s bad news for savers. The low Fed funds rate means that Certificates of Deposit (CDs) are yielding an interest rate of around 1% per year for a 1-year term. If inflation comes in at around 3.5% this year as expected, that means your money lost around 2.5% for the year.

Rates will continue to be low next year, so it may be wise to pull your money out of CDs and low interest-bearing checking and savings accounts and invest it in other things that may give you a better return. Some of the safer options include stocks that pay a high dividend or tax-free municipal bonds.

Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati