REPOST: US personal incomes jump ahead of New Year tax rise

This BBC.com article talks about the efforts of high earning US citizens to beat the New Year tax rise.

Image Source: Forbes.com

 US personal incomes jumped 2.6% in December, the biggest monthly increase since 2004, as high earners sought to beat a New Year tax rise.

The month was marked by accelerated bonus and dividend payments, the US Commerce Department said.

Income tax cuts dating back to George W Bush's presidency were due to expire in the New Year as part of the "fiscal cliff" of tax rises and spending cuts

Despite the boost to incomes, consumer spending rose only 0.2% in the month.

"Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates," the Commerce Department's Bureau of Economic Analysis said.

Image Source: PolicyMic.com

In the event, the tax rises went ahead only for individuals earning more than $400,000 (£250,000), as part of a last-minute deal negotiated between Republicans and Democrats in Congress to avert the fiscal cliff, with the top tax rate rising from 35% to just under 40%.

Capital gains tax also rose on 1 January. Special factors

The 2.6% increase in incomes in December came on top of an unusually high 1% rise the month before.

Other factors also exaggerated the income increases in the two months, including lump-sum benefit payments handed out in December, and the loss of income for many in the New York area during October because of disruption from Storm Sandy.

Excluding all of these special factors, incomes rose 0.6% in November and just 0.4% in December - in line with the trend increase during the rest of the year.

Image Source: TheInnoplex.com

 Most of the windfall income was not spent, with the US personal savings rate increasing from 4.1% of income in November to 6.5% in December. 

Indeed, the seasonally-adjusted growth in spending slowed noticeably in the run-up to Christmas, from 0.6% in November to 0.2% in December.

"Consumers finally realised about the tax increase so they pulled back a bit on their spending during the holiday season," said Sam Bullard, senior economist at Wells Fargo.

Consumer spending is expected to remain weak in the New Year, owing to the impact of a rise in payroll taxes, also agreed as part of the fiscal cliff deal.

Personal incomes are also likely to experience a drag in January and over the coming months, reflecting the fact that most of the increase recorded in December was merely income that had been brought forwards.

Isidor Hefter is an expert in tax planning and estate planning. This Facebook page contains the latest financial news.