It's time to watch Washington to see just how bad your New Year's Eve is going to be.

Without any action in the Capitol, the U.S. economy is said to be poised to fall off a "fiscal cliff." Projected increases in taxes and cuts in spending would throw the economy into another recession, says the Congressional Budget Office, and it could throw your family finances over the edge, according to analysts.

That's because of several issues all hitting at once. The George W. Bush-era tax cuts expire on Dec. 31, and without any extensions personal income tax rates will rise, as will rates on capital gains and dividends.

Also expiring is the temporary 2 percent payroll tax cut that has boosted workers' paychecks for the last two years. Beginning Jan. 1, there's a new 3.8 percent surtax on investment income for people earning more than $200,000 ($250,000 for couples).

Oh, and another passel of tax breaks, including the perennial patch that exempts some 30 million Americans from the alternative minimum tax (AMT), already expired on Dec. 31, and has not been extended -- yet.

Does all of that make you feel like jumping off that cliff? Don't panic. Here's how to put up your own guardrails and then stand aside as policymakers rush to the precipice. It's where they do their best work.

Sell or give away winning stocks. Right now, long-term capital gains are taxed at a maximum rate of 15 percent. They have a zero percent tax rate for people with adjusted gross income of less than $35,350 ($70,700 for couples).

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"That is the lowest rate they have ever been in our near-term history, and it's scheduled to go away," says TurboTax's Bob Meighan. You can't get a better tax rate than zero, so if you have the wherewithal to help your low-bracket young adult kids, you might start by giving them shares of appreciated stock.

Even if you don't have anyone in the zero bracket to give those shares to, you could sell them yourself, locking in gains at comparatively low tax rates.

Be very charitable. There are many scenarios in which your charitable deductions could be worth less in the future. Republicans have been talking about capping those deductions for high-income taxpayers. There's some talk of a Reaganesque rate-lowering, deduction-trimming tax reform that could reduce the value of your contributions as tax breaks.

The bottom line?

If you can afford it, 2012 is a good year to set up your own donor-advised charitable fund, or give more than usual to your favorite cause. It's also a good year to fund a family trust or give a large estate tax-escaping gift to family members.

There's one exception. Retirees older than 70 1/2 who have to take mandatory distributions from their individual retirement accounts had been permitted to make contributions to their IRAs without taking a tax hit. That went away at the end of 2011.

Do the opposite of what you'd usually do. "This year we are telling people to accelerate income and defer deductions," Rick Bailine of McGladrey Llp told Reuters journalists recently.

His view is that tax rates are headed up.



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  • 1. Make an appointment with a financial adviser.

  • 2. Don't make dramatic portfolio adjustments in advance of congressional action, because anything can happen.

  • 3. Live below your means. Your paycheck is likely to shrink in January due to a rise in payroll taxes.