Fiscal Cliff Tax Repercussions — What is It + How Will It Affect You?
“Fiscal cliff” is a phrase we have heard a lot lately. And we’re going to hear a lot more of it if Congress doesn’t reach an agreement by midnight tonight and going into 2013. While it’s sometimes easy to brush off what politicians are up to, this actually will affect almost all of us financially — many of us substantially.
What is the ‘Fiscal Cliff?’
Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, a rollback of the “Bush tax cuts” from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”
But, what happens if a deal isn’t reached? If you fall into the mix with most Americans (middle class), that could mean thousands of dollars out of your pocket in 2013.
Because tax cuts would expire if a deal is not reached, that means more income taxes and payroll taxes will be taken out of your paycheck.
But how much, exactly?
BankRate.com has a good calculator to estimate how much money you would lose if a fiscal cliff deal isn’t reached.
For a family of four with a total income of $50,000, total taxes would go up almost $2,300 for the year. For a family of four with a total income of $100,000, total taxes would go up almost $5,000.
The Good and Bad
If this policy goes into effect, the advantage the U.S. would see is the trillions of dollars in debt we have would lower significantly. The downside is millions would be seeing less money at home and the government would institute billions in spending cuts, which not only would result in job losses, but it also raises worries of another recession.
Many estimates have the deficit being reduced by as much as half if the policy goes into effect, but the Congressional Budget Office has warned a recession would soon follow.
Where do you stand?