Several developments in Washington could have a significant impact on the economy and, ultimately, on your wallet in 2014, whether you are a business owner, a homeowner in a high-risk flood area, or an online shopper.
And with another debt ceiling battle on the horizon, the Federal Reserve’s bond purchases winding down, and numerous Affordable Care Act (ACA) provisions taking effect, make sure to keep these things on your radar.
The debt ceiling: The Treasury Department expects the government to run out of money sometime in late February or early March, requiring an increase in the federal borrowing limit (surprise!). The ideological fissures that forced the debt ceiling stalemate in 2013 remain, which makes another standoff more likely. The temporary deal that ended that battle expires in early 2014. President Obama and congressional Democrats have said they will not negotiate on the debt ceiling. House Speaker John Boehner (R-Ohio) is unlikely to pass a clean debt increase without some offsetting spending cuts.
Why should you worry about the debt ceiling? Past brinkmanship to raise the debt ceiling led to the first downgrade of the U.S. credit rating in 2011. The impact extended to the broader economy, contributing to lower equity prices and increased corporate and household borrowing costs. It also lowered consumer and investor confidence, which led to businesses postponing hiring and investment and individuals delaying purchases. Another debt ceiling showdown in 2014 could have ripple effects throughout the economy, undermining the economic recovery.
Higher mortgage rates: The Fed announced in December that it will begin tapering its bond purchases in 2014. The Fed has been buying $85 billion a month of bonds to keep long-term borrowing rates low to stimulate spending and growth. The interest rate on long-term loans, such as mortgages, is likely to rise as the Fed slows bond purchases. Mortgage rates are still well below their historical average, but if the economy continues to improve, you should expect rates to rise steadily.
Based on the latest quarterly data, the U.S. economy appears to be picking up steam. Higher growth rates will increase demand for available credit and probably push mortgage rates higher. In addition, Fannie Mae and Freddie Mac, the housing-finance giants that dominate the mortgage market, are boosting the fees they charge to lenders. These higher fees will inevitably be passed along to borrowers.
So whether you are thinking of refinancing your mortgage or buying a home, be mindful that rates are on the upswing this year.
Expiring tax breaks: Congress let a package of 55 tax breaks expire at the end of last year. The full array includes tax breaks that allow companies to write off research and development costs, deduct half the cost of new equipment purchases right away, and get tax credits for hiring veterans.
For the last two years, employers could choose to cover (tax-free) up to $245 of your expenses per month for taking the bus or train. As of Dec. 31, employers can now cover only $130 per month tax-free. Gone also is the tax relief program for “underwater” homeowners who received a debt write-down from their banks. Anyone who gets relief on their mortgage will now have to pay taxes on that amount.
The end of these programs will raise the effective tax rates for many companies and individuals, unless Congress decides to extend them. Lawmakers have allowed these tax breaks to expire in the past, just to eventually renew them retroactively. Nevertheless, this process makes it more difficult to plan as it heightens the uncertainty that some tax breaks will not be renewed.
Obamacare fees: New taxes will pile up on insurance premiums and income tax bills for many Americans in 2014. These taxes took effect in 2013 so some people might start noticing them when they file their returns on or before April 15. The new taxes and fees under Obamacare include a 2 percent levy on every health policy, the New York Post reports. Under the ACA, individuals earning more than $200,000 and households earning more than $250,000 will pay an added 0.9 percent Medicare surtax in addition to the existing 1.45 percent Medicare payroll tax. If you are among those above these income thresholds, you will also pay an extra 3.8 percent Medicare tax on unearned income, such as rental income and investment dividends.