There’s been a lot of talk in Washington D.C. and in the media about the so-called “fiscal cliff.”
But what exactly is the fiscal cliff and how will impact you and your family?
Let me offer a definition of the fiscal cliff and provide some context about how this issue will directly affect your finances.
The fiscal cliff refers to the end-of-year economic scenario facing the U.S., a scenario that could result in nearly $600 billion in increased taxes and spending cuts for Americans in 2013 unless Congress addresses some key issues by December 31, 2012.
In a nutshell, if President Barack Obama and members of Congress don’t agree on what to do about federal income taxes and hundreds of government programs, the United States could plunge over the fiscal cliff and land smack dab into another recession in 2013.
How bad would it get for the nation – and for your wallet – if elected officials can’t avoid the fiscal cliff?
The Congressional Budget Office has estimated that if the U.S. “falls off” the fiscal cliff, the economy would lose about two million jobs, and the unemployment rate would rise by nearly one full percentage point. As of this writing (in mid-December 2012), the jobless rate in America was 7.7% in November 2012.
Furthermore, failure to avert the fiscal cliff would dog the U.S. economy far beyond 2013. It would ultimately trigger more than $7 trillion in tax increases and spending cuts over a decade.
Currently, Americans are benefiting from a huge number of tax cuts and tax deductions, including a 2% temporary reduction in payroll taxes, education tax breaks, childcare tax credits, small business tax credits and more.
But since Congress couldn’t agree on a bi-partisan debt reduction plan in 2011, the Budget Control Act is slated to kick in at the end of 2012, meaning a lot of the current tax breaks and deductions are set to go away on Dec. 31, 2012. And if these tax breaks do expire, personal income taxes will rise in 2013, beginning January 1st, 2013.
What’s more, starting in 2013, spending cuts would automatically occur to more than 1,000 programs, including massive cuts to Medicare, the defense budget, and education.
One difficult cut would directly impact unemployed Americans who lost a job after July 1, 2012. Those jobless workers would see their unemployment benefits slashed to just 26 weeks of compensation, compared with the 99 weeks worth of maximum unemployment benefits that were available until recently.
Most economists predict that if we do go over the economic fiscal cliff, the typical U.S. household earning about $50,000 dollars per year would pay roughly $2,000 more in federal income taxes in 2013.
That’s a big chunk of money for a lot of people’s budgets.
Those who make less than $50,000 annually would see a smaller increase in their income taxes, while those earning more – especially six-figure wage earners – would pay a lot more, perhaps as much as an additional $10,000 or more in income taxes.
And here’s where things get tricky.
In Washington D.C., the biggest sticking point between Democrats and Republicans is over income tax rates, particularly those for wealthy taxpayers.
President Obama has proposed to increase taxes for households earning an adjusted gross income above $200,000 or $250,000 annually. The $200,000 threshold would be the marker for single taxpayers, while $250,000 would be the benchmark for higher taxes for married couples that file a joint tax return.
So far, though, Republicans have balked at increasing taxes on the rich.
And without an agreement over taxes, a series of automatic tax increases would be implemented and income tax rates would rise for all Americans in 2013.
The current tax rates in the U.S. are: 10%, 15%, 25%, 28%, 33% and 35%. Depending on your income, those tax brackets would rise to 15%, 28%, 31%, 36%, and 39.6%.
So here’s hoping Congress can avoid the so-called dreaded fiscal cliff, avoid another recession, and keep most Americans from suffering unnecessary tax increases and painful spending cuts.