Fiscal cliff notes, in case we need them
If no fiscal cliff deal occurs, it's estimated that 80 percent to 90 percent of Americans would see some form of tax increase next year. The Tax Policy Center estimated that taxes would jump by an average of $3,500 per household, with middle-income households seeing an average increase of almost $2,000. Credit: iStock
The "fiscal cliff" is now front and center in the national consciousness, and the time is right to help you further understand what is at stake for you and your pocketbook.
The cliff refers to the combination of tax increases (from the expiration of Bush-era tax cuts and President Barack Obama's temporary tax cuts) and across-the-board reductions in government spending, which resulted from the debt ceiling negotiations. Both are scheduled to be triggered on Jan. 2, 2013. The tax increases total $532 billion, while the spending cuts amount to $136 billion. Federal Reserve Chairman Ben Bernanke popularized the term "fiscal cliff" mainly because allowing the increases and cuts to trigger will equate to jumping off a financial cliff and likely spark another recession.
That sounds bad, but what does that mean to you? If no deal occurs, it's estimated that 80 percent to 90 percent of Americans would see some form of tax increase next year. The Tax Policy Center estimated that taxes would jump by an average of $3,500 per household, with middle-income households seeing an average increase of almost $2,000.
Here are some other effects of fiscal cliff-diving:
Most analysts believe that the payroll tax cut will not be extended, which will affect 160 million working Americans. The "payroll tax holiday" was a 2 percent reduction of the employee contribution to Social Security and Medicare on the first $110,000 in wages (that is, the "FICA" line item on your pay stub). For a family earning $50,000, that will mean a tax hike of $1,000 per year.
There is broad agreement that the full effect of the fiscal cliff would hurt the economy and cost jobs. That's why Congress and the White House are trying to find a common ground solution that is a balanced approach, with both tax increases and significant spending cuts, but not so severe that the economy goes into a recession.
