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Falling Off the Fiscal Cliff: How Would It Affect You?

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fiscal cliffThere has been much said in recent weeks about the so-called fiscal cliff. The fiscal cliff is a combination of tax increases, as well as spending cuts set to take place in January. The effect is expected to be greatest on the middle class, since the cuts might result in job loss, as well as higher taxes.

With the presidential election over, a lot of the focus is on what happens if members of a very divided Congress can come together, compromise, and pass a law that blunts some of the effects of the fiscal cliff. Some of the options for blunting the effects of the fiscal cliff include raising taxes for the top earners, but leaving middle class tax brackets in place, as well as keeping some of the spending that most affects middle class families in terms of jobs.

Higher Income & Payroll Taxes

The so-called Bush Tax Cuts were extended as a way to promote economic growth, but the extensions are just about done with. If these tax breaks expire, taxes pretty much rise across the board. That means the lowest marginal tax rate rises from 10% to 15%, and the top rate goes up to 39.6% from the current top rate of 35%. According to the Tax Policy Center, that means an average increase of $2,000 a year for middle class families.

Also, the current FICA/Social Security tax cut will expire at the end of the year. The employee portion has been seeing a 2% reduction, and the loss of that is going to show up in your paycheck. Realize, though, that only the first part of your income is subject to Social Security taxes. So, once you get beyond $113,700 (for 2013), it doesn’t matter how much you make, you will only pay FICA/Social Security on the first $113,700 that you earn.

There are some suggestions that tax rates could be allowed to rise for the top earners, but remain where they are for everyone else. Some have also suggested raising the amount of income subject to Social Security taxes. Even most of those who don’t end up paying federal income tax still pay taxes in the form of the payroll tax.

Higher Investment Taxes

You also have to watch for investment tax changes. The capital gains top rate goes from 15% to 20% with the new year, and there is no more special treatment for dividends. Those go from being taxed at 15% to being taxed at your marginal rate. If you are afraid of these changes, now is the time to sell your long-term capital gains. You also need to realize that, if you receive money from dividend income, that you are probably going to see a little bit less of it.

Cut Benefits

One of the biggest cuts to benefits includes the extension of unemployment benefits. The loss of unemployment benefits would affect families collecting these benefits, and using them to help keep the household afloat. Other cut benefits might affect doctors that accept Medicare, reducing their payouts, as well as money that goes to research and development. There are estimates from the Congressional Budget Office that indicate that some of the cut benefits could result in unemployment heading up above 9.1%.

Bottom Line

Many on both sides of the aisle recognize that the rate of deficit spending has to be reduced and that steps need to be taken to help the economy. However, how to that is a thorny question. While some insist that more tax cuts are the way to create jobs (in spite of the CBO’s assertion that tax cuts alone are one of the least effective ways to help the economy and create jobs) and boost the economy, others insist that tax increases on the wealthy should offset spending.

However, the reality is that any drastic measure — tax cuts or spending cuts or massive tax increases — will likely shock the system. As a result, some are calling for a measured and gradual approach that combines some modest tax increases on some segments of the population with targeted, measured spending cuts.

What do you think is likely to help the situation? And do you have plans to shore up your finances against the fiscal cliff?

(Photo: m.prinke)

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28 Responses to “Falling Off the Fiscal Cliff: How Would It Affect You?”

  1. I expect my taxes to go up, along with a small raise. I will probably end up with a smaller paycheck and will adjust my budget when everything is settled.

  2. Jim M says:

    In addition to paying higher taxes, I expect my job to be in jeopardy. I also expect the value of my house to go down and the country to sink back into recession. Yikes!

  3. Jesus says:

    I knew this was going to happen. That is why I invested all my money into my house. At 27 I am only 5k away from paying off my house. I just hope I wont lose my job due to government regulations on Frac. Good luck to all of you since it will be a rough ride coming up.

  4. C. Dowling says:

    Lower expectations; try to spend less; save more; make extra money; invest carefully.

  5. Brannon H says:

    Higher taxes will not fix anything. Are you kidding? That money is ALREADY spent and they will just botch the whole bag of beans. Spending needs to go down to the MINIMUM!

  6. Bryce says:

    I hope everyone who voted for Obama again are happy with the tax increases. He would love to tax everyone as much as possible and increase the government programs to provide for the citizens. Now that he doesn’t have to worry about re-election, we’re in for a world of hurt. This is just a taste of what’s to come. Great job, America!

    • Jim says:

      I voted for Obama and I’m happy with the tax increases. I think you forget that the deficit grew tremendously to fund two wars under a Republican President while cutting taxes… that has to come home to roost eventually. Trying to inject politics into this is a mistake because this would happen regardless of who sits in the White House.

      • Mark says:

        While it is true that the deficit increased under Bush, the “war” portion equated to 800B dollars over 8 years, Obama spent that amount EACH year of his presidency. So lets keep it in perspective, shall we..

        • Jim says:

          So you’re comparing the deficit of one President with the spending of another? Doesn’t seem like a fair comparison, especially when you don’t factor in inflation and decisions made by previous governments.

          • Ben says:

            Spending creates deficits. True President Bush II left office with a deficit. That is why Obama promised in 2008: “Everything we will do, we will pay for.” and “We will cut through the budget line by line and cut programs that don’t work and make others work better.”
            People were impressed with the promises he made so Obama continued to criticized Bush in 2008 saying: “Adding $4 trillion to the debt is unpatriotic and irresponsible.” So I expected him to operate quite differently than he has in office.
            President Obama promised in 2010: “We will cut the deficit in half by the end of my first term in office.”

            You do not hold him to his word. To you it seems none of these lies matter. Why is that?

      • Jim, your comments only prove that you are not in touch with reality, history or the basics of math. Politics has everything to do with the financial problems we’re facing now. They will also be the primary reason that whatever the Congress “compromises” on within the next 30 days will fall well short of actually correcting the pending, economic disaster that this country is about to face. Spending did get out of hand under the last Republican administration. No one denies that, if they are honest. However, that pales in comparison to the damage done over the last four years or the compounding damage that will be done over and beyond the next decade. When you are unemployed and enduring the greatest economic depression this country has ever seen, right along with the rest of us, you will have yourself and fellow, uninformed voters to thank for your mutually poor decisions.

        • Jim says:

          Are you sure it pales in comparison? You’re saying that the last four years have been worse for the country than the 8 years of Bush and two wars? What about in the countries we invaded and the service members we’ve lost fighting wars across the world? Besides writing down unsubstantiated claims and hitting emotional triggers, why not some facts?

          My point was that it doesn’t matter which “party” is in control and to blame one without looking at the other is wrong.

          • Jim, I am very sure. In fact, I’m more than sure. Read the WSJ article, completely, if you need facts. If you find flaws with any part of the logic or facts presented in the article, let me know. In the meantime, and judging by your admission of your actions taken on Nov. 6th, I’ll rest assured and fairly confident that logic and facts matter little to you.

            My point isn’t to solely blame Democrats or the President. My point is that we’ve seen zero progress towards fiscal solvency or economic improvement under the current administration, as promised in 2008, and evidenced by unemployment and a deficit that continue to growing, rather than contract. We’ve seen a failure in handling of foreign policy, evidenced by the assassination of Ambassador Stevens, etal – the first time this has happened since 1979. Learn all you should about the clear signs of impending danger that were obvious and present long before the terrorist attack in Benghazi on September 11, 2012. Ask yourself why the British pulled their personnel from Benghazi, while we left our people on the ground there, without adequate protection. It had nothing to do with budgetary issues. We haven’t seen a budget in nearly four years – a first, ever. You can try, but you can’t truthfully blame Republicans for two of those four years, since Democrats controlled both Houses of Congress until after the mid-term elections in November of 2010.

            The world is a more dangerous place for U.S. citizens, both physically and economically, thanks to weak, ineffective, liberal efforts to protect us and poorly crafted legislation not thought through or even read before or after passage, evidenced by Barney Frank’s own admission of unintended consequences of that legislation bearing his namesake and the scores of layoffs very recently announced by dozens of employers, soon after it became obvious that Obamacare would not be immediately repealed by a new administration.

            If you need a CPA or a financial expert, you hire one, not a community organizer. If you need an experienced security consultant, you hire one, not a community organizer. If you need a leader who understands how to lead, rather than to polarize half the country against the other half, you find one. If you need legislators with backbone and experience, you elect them, rather than continue to re-elect lawyers who could not cut it in the real world of business, law or teaching.

            As the WSJ article clearly explains, we could raise taxes on everyone to 100% and that would still not be enough to counter your beloved liberals’ social spending spree over the last many decades. To some extent, your point is valid. It does not matter who is in control, unless and until that “who” doesn’t have enough common sense to come in out of the rain. Experience, character and track records/voting records matter.

            Romney was not the most ideal candidate to replace Obama, but you have no facts, track record, experience or voting record to prove Obama is the better leader, or remotely able to pull people, businesses or other nations together. Now that we must endure his second term, when do you think he will he decide to become an American leader, instead of a “Progressive” leader of the far left? I would welcome that change and hope that it happens. Soon!

        • DMoney says:

          “Praying for the future” – Stop parading the same tired hyperbolic, doomsday rhetoric as defense to anyone with a differing opinion — it makes you look rather silly.

          Jim has a point — the blame (and responsibility) reaches across the isle, and across multiple administrations, and throwing some partisan name-calling and ballyhooing won’t change any of that and it’s definitely not at all proactive.

          Hopefully the sentiment in Washington is far less cartoonish, and more approachable and proactive than yours.

      • Bryce says:

        Fair enough, but raising everyone’s taxes certainly isn’t going to help anything. When more people are unemployed and paying more because of higher taxes, the government will have much less of other people’s money to spend overall. The way to get it done is to reduce spending, but that’s a totally foreign concept to this administration…

  7. Rizzo says:

    Who knows, because I haven’t seen any firm plans from anyone including the president.

    The other big issue is capital gains, what will happen with them? 50%????

  8. This is quite an optimistic, less than fully-described assessment of an unavoidably catastrophic situation that Ms. Marquit has. I’m doubtful that there remains much time to “shore up” one’s finances in preparation for what will soon be an unbelievably deep recession – also known as the Greatest Depression this country has ever seen. We will wish for unemployment at 9.1%, rather than the double-digit figures that will exist over the next several years. Huge layoff notifications have already been reported, with hundreds of thousands to immediately follow when our Congress most assuredly fails to adequately address the monumental issue at hand.

    The biggest part of the very real problem is our government’s failure to accurately assess the problem’s scope and the mainstream media’s complicity in not reporting it accurately. Finally reported in the WSJ article linked below, it clearly and accurately outlines that a marginal tax rate of 100% would still make only a small dent in the outrageous, actual national deficit that would continue to grow, without deep and liberally-unacceptable cuts to entitlement expenditures. After you read this article, you’ll have two choices: keep your head in the sand of disbelief, or pull it from your rear end and realize that this nation cannot continue to support anywhere near the current level of spending on social programs. We can cut defense spending and many other programs too, but we have no choice but to make deep, significant cuts to social programs, if we hope to survive a pending, economic catastrophe.

    http://online.wsj.com/article/SB10001424127887323353204578127374039087636.html?mod=WSJ_Opinion_LEADTop

    • Scott says:

      Please take your finger off of the panic button. You can blame the government, but I blame you, me, and every other American for getting us to this point. We’re a democracy; we’re all responsible. And your problem seems to be less that you have lost faith in your government and more that you have lost faith in your fellow Americans. Others like myself have not.

      To quote the movie Apollo 13, “With all due respect, sir, I believe this is gonna be our finest hour.” Yes, this fiscal cliff is going to be a shock to the system. But (in my opinion) that is exactly what our system needs right now. Americans have seriously lacked a real challenge for some time now (even our most recent recession was coupled with widespread bailouts) and have lumbered along sleepily enjoying our entitlements and low taxes and favorable interest rates, all while having very little vision of what we’re all working toward as a collective society.

      But given the wake-up call that is coming, we will rise to the challenges ahead of us I am sure. You may focus on the “doom and gloom” of the end that is near, but I choose to focus on the new beginning that is right around the corner. God bless America. We will prevail.

  9. NateUVM says:

    An OpEd piece to rule the land, eh…?

    Let’s take a look at some of the math being presented…

    Roughly 50 million people eligible for Medicare/SS.

    Maximum SS Benefit: $30,396 (Thank you Miranda Marquit)
    Average Medicare Benefit (2009): $8,086 (http://www.justfacts.com/healthcare.asp#spending)
    Average Medicare Benefit in 2012, assume 4% growth): $9,096

    Total Liabilities for those 50 million that are eligible: $1.97trillion.

    Not nothing. But certainly not the 7 Trillion suggested by your OpEd. So much for math being a strong suit…

    How about History? One of the greatest eras of economic expansion our country has ever seen was from the late 1940′s through the late 1960′s. Any idea what the highest marginal tax rate was during that era (which is all we are talking about, the HIGHEST tax rate)? Check it out: http://visualizingeconomics.com/tax-rate-poster/

    That’s right. It was in the 90%s. Amazing. In fact, it’s been shown, repeatedly, if you consider history anyway, that 1) tax rates have had almost ZERO effect on economic production, and 2) that Supply-Side economics has NEVER worked, in any situation.

    So….so much for history driving a push for lower rates of taxation…

  10. Ben says:

    “…when Reagan inherited an economy that Jimmy Carter had left with 10.6 percent unemployment, double digit interest rates, and inflation of 20 percent, he did not blame the previous administration (as a more recent president as been wont to do), but instead got down to work and lowered marginal tax rates and reduced deductions. The result was that by the end of his term the economy was roaring at 6.2 percent, unemployment was cut almost in half, and America was on its way to eight years of sustained economic growth…
    The obvious compromise to avoid the fiscal cliff would be to raise revenues from the rich by adopting Romney’s plan to lower marginal rates and limit deductions to $50,000—which is exactly why it won’t happen. As the “realists” point out, politicians will never give up the game of handing out tax deductions to special interest groups in exchange for campaign contributions.”
    –Robert Hardaway, Professor of Law

  11. Steph says:

    Well, I can make ends meet at this time, but when my federal loans come into repayment next year, I’m pretty much screwed. And that assessment was made budgeting based on my CURRENT income. If the tax cuts expire, I will have $70 less each month, which will be a significant portion of my disposable income, which was already pretty non-existent. I’m still confused how I can be considered middle class when I’m living on a beer budget (minus the beer come February).

  12. NateUVM says:

    Rizzo – Actually, there is a budget plan that has been passed by the Senate that the President has stated he would sign if the House were to pass it. Some Republicans in the House are even currently urging Republican “Leadership” to bring it to a vote. Boehner, however, is currently holding the country hostage on this one.

    http://www.cnn.com/2012/11/28/politics/fiscal-cliff/index.html?hpt=hp_t1

  13. Anonymous says:

    Miguel Says:
    2000 dollars tax increase is the equivalent to one month house mortgage, services bills and food.
    In a country of Blind people, The one eye person is the King

  14. Barry Selznick says:

    The only way I can see myself and my family get through this is to stop all unnecessary spending…movies, eating out, new clothing, accessories, etc. we will be cutting back even more on our groceries. I see us eating soup meals 7 days a week.

  15. Casey Marshall says:

    My thermostat is already set at 58 degrees this winter. It’s 24 degrees outside tonight. I can’t imagine having to stop buying gifts for my family but I will do it if it means being able to put food on the table. I’ve been working 40 years and will retire in a few years. What do I have to look forward to?

  16. Dick says:

    Don’t worry hopefully it end’s tomorrow


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