How The Fiscal Cliff Affects You

You may have been hearing the term fiscal cliff tossed around on your local news station and disregarded it as yet another abstract idea for Republicans and Democrats to prove how dysfunctional they truly are. Maybe you don’t think it has any bearing on little ole you. Well keep reading, because you may be in for a surprise at how much this is going to cost you, starting with that first paycheck in January 2013.


It refers to a set of expiring tax cuts (your rates are going up-not just the rich) and severe domestic spending cuts, especially to the military budget, which are due to take place at the beginning of 2013 if Congress and the President cannot agree on a budget deal by December 31, 2012.  The ‘cliff’ metaphor refers to the dramatic combination of increased taxes for just about everyone, while the government pulls back spending on many programs affecting everyday citizens. This is expected to reduce the growth in the government’s deficit (the gap between the amount the government takes in versus what it spends), but potentially plunge the country back into recession. This likely means a rise in unemployment, as businesses suspend hiring and reduce payroll in an attempt to cover cost in anticipation of higher taxes and fewer tax breaks. Meanwhile, those who are still employed will see smaller paychecks since the federal payroll tax cut (federal income tax + SS/FICA + Medicare deductions on your paycheck) will have expired by the end of 2012.  That means that a person making $50,000 will have had $2100 in Social Security/FICA taxes taken from his/her paycheck in 2012, but stands to have $3100 taken in 2013, and that doesn’t include the federal income taxes taken from your check every two weeks!


Remember the debt ceiling fight the President had with Republicans in Congress earlier in 2011? It was a fight over whether to let the government take on more debt in order to pay its bills. Well both sides resolved the issue with a deal signed by the President in August 2011 called the Budget Control Act (of 2011). The debt ceiling was increased, however the deal created a committee of Democrats and Republicans who agreed, that if no other deal were reached before December 31, 2012 to reduce growth of the U.S. deficit, they would implement a series of massive spending cuts to more than 1,000 government programs including the military and Medicare (grandma won’t like this). In addition, the Bush Tax Cuts and Payroll Tax Cuts would be allowed to expire affecting the rich, poor, and everyone in between.


You might lose your job; especially if you work for a small business or agency that relies on a government contract. Reduced government spending means less money for services provided or paid for by the U.S. government. So, even if you keep your job, expect to see those hours reduced. If you rely on a government program for school aid, food, babysitting, etc, look out for changes you may not like. The rest of us, aside from seeing our weekly and biweekly paychecks reduced will also have to look out for a dramatic rise in the amount owed during tax time 2014 (see Alternative Minimum Tax). If you don’t think you make enough to worry about a tax bill, then at the very least be prepared for a significant reduction in the amount of money returned to you during tax season 2014. Remember, tax rate increases across the board means a reduction in the amount of money the federal government has to refund back to you. Unemployment would likely rise as payroll taxes (partially paid by employers for each employee on the payroll) would go up, so getting a job will only become harder.  Adding to the misery, will be the expiration of any extensions on federal unemployment checks.


Not much. If you own stocks or have a summer home to sell, then you should probably try and get that in by the end of the year before capital gains taxes likely go up. The rest of us need to sit back and hope for the best. President Obama and de facto Republican ring master John Boehner are the men you should pay close attention to for an idea of how the current negotiations are going. President Obama and Democrats want to balance the budget and cut deficit spending through increased taxes paid by those making more than $250,000 along with moderate spending cuts. Meanwhile, Republicans want no tax increases with far greater federal spending cuts, citing the need to protect “job creators” from an increased tax burden that would reduce their desire to invest or hire. What does this stalemate mean? It means we should all pray.


I don’t think a compromise will be reached by December 31, 2012. However, I do expect some patchwork will be done to delay some of the nastier provisions that are set to take place. I expect that the payroll tax cut will be extended by a few months into 2013, while some of the spending cuts and taxes affecting the poor and middle class will be tweaked to spare us all for much of next year. A long term solution doesn’t seem too likely in this current climate of politics anytime in the near future, but some sort of compromise will likely come in the first half of 2013. Since the tax hikes are automatic, the President has some measure of leverage against those who are opposed to tax hikes altogether. Their choice is to negotiate or watch the taxes rise severely anyway, with much of the blame for cuts in social programs being laid at their feet. This whole fight is largely about saving face and appearing to put up a good fight, for both Democrats and Republicans, before finally caving in to a solution that everyone can live with but nobody is totally thrilled about. Then again, we are just as likely to see our taxes rise along with the cost of everything going up as well. One of my favorite songs and one of the best ways to sum up Washington: ‘Politics As Usual.’

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