Who Will Be Affected By The Fiscal Cliff?

As 2012 comes to a close and we all gear up for  the new year, all we’ve been hearing about on the news is talk of the fiscal cliff.  The talking heads are talking about whether or not our country is going to go careening off the Fiscal Cliff like Thelma and Louise, or if the government – and Republicans and Democrats – will come to some sort of an agreement on tax rate extensions, tax increases on the wealthy and spending cuts.  If they’re going to do it, it has to be soon!

For most people I don’t think they really understand what is being talked about. It’s an abstract concept being talked about in Washington D.C. by politicians that doesn’t really affect their lives.  If they were to see a decrease in their paychecks come 2013, most wouldn’t understand why.

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Today I want to look at and explore who will be affected by the fiscal cliff.

What Is The Fiscal Cliff?

Fiscal Cliff 2013

In case you don’t know exactly what the fiscal cliff is, here’s a brief synopsis.  Basically a whole bunch of spending cuts and tax increases are slated to take effect at midnight on 12/31/2012.

Among the expiring tax cuts and tax increases due to Obamacare for 2013 –  if nothing is done:

  • Bush tax cuts expire: The Bush era tax cuts, which were extended for two more years by Obama, will expire on 12/31. If nothing is done we would see the tax rates increase for basically all taxpayers.  Current federal income tax brackets would be increasing 3-6%.
  • Social Security payroll tax cut ends: The payroll tax cut which was extended for 2012 will expire, meaning an increase of $1000 in taxes on average.
  • Child tax credit cut in half: The $1000 child tax credit would be cut in half to $500.
  • Earned Income Tax Credit goes away:  One thing that could hurt low and middle income taxpayers is the fact that the Earned Income Tax credit, which is a refundable tax credit, would go away.
  • Estate taxes increase:  Currently the first $5 million of an estate avoids estate tax.  Above $5 million it would have a 35 percent tax rate. If it expires the exemption would drop to $1 million, and the tax rate would go up exponentially to 55 percent.  This could definitely hurt those with small family owned businesses.
  • High earners may be subject to new Medicare surtaxes: Those earning more than $200,000 single or $250,000 married filing joint may be subject to new surtaxes on investment income, as well as an increase in the Medicare payroll tax.
  • The marriage penalty.. It’s back: The standard deduction for married filers would no longer be twice that of a single filer – re-engaging the so called “marriage penalty”.
  • Dividends taxed as ordinary income: The tax on dividends goes up from 15 percent to as much as 39.6 percent, which could be extremely bad for many seniors who rely on dividends.

Also, if nothing is done mandatory spending cuts will be in effect due to the debt ceiling deal of 2011.  There will be cuts to over 1,000 government programs, most notably the defense budget and Medicare.  Not only that, but long term unemployed people can expect to see the extended benefits expire at the end of the year unless something is done.

How Will The Fiscal Cliff Affect You?

The thing most folks want to know about the fiscal cliff is, how will the fiscal cliff affect me?  A majority of us will see increased taxes next year if nothing is done, almost 88% of us! From CBS:

According to the Tax Policy Center, a nonpartisan research group, going off the cliff would affect 88 percent of U.S. taxpayers, with their taxes rising by an average of $3,500 a year. The reason is that Bush-era tax cuts are set to expire, which will bring the tax system back to 2001 levels. Also set to lapse are a 2 percent payroll tax cut and a series of other temporary tax cuts for businesses that Mr. Obama enacted. These include the enhanced dependent care credit, enhanced child credit, enhanced adoption credit, enhanced earned-income credit, repeal of personal exemption phase-out, repeal of limit on itemized deductions, enhanced student loan interest deduction, and an exemption for mortgage debt forgiveness.

So if congress doesn’t act the average person will see their taxes go up by thousands of dollars a year.  I think that’s enough to make it noticeable in most people’s paychecks.

How Much Will My Taxes Go Up By?

If you’re curious about how much your taxes will be going up by, there are plenty of resources that can give you a rough idea of how much more you’ll be paying next year.  I found one particular helpful fiscal cliff tax calculator that gives you a pretty good idea of what to expect. Here it is:

Running the calculator showed me I’d probably be paying about $6100 extra in taxes next year, or a 7% decrease in take home pay. That’s a lot less money in my pocket to give, save or invest, I’m not exactly excited at that prospect. How about you?  How much more would you be paying?

Will They Get A Fiscal Cliff Deal Done?

As of the writing of this article Congressional leaders and President Obama had just met on Friday the 28th, and were trying to work out details of a deal.  They called the meeting “constructive” and were optimistic a deal could be reached.

After a late-hour meeting with four top congressional leaders at the White House on the “fiscal cliff” that seems to have led to progress, President Obama said he is “modestly optimistic” that a deal can be reached before Tuesday’s so-called “fiscal cliff” deadline.

In a news conference after the meeting, the president said it was a “good and constructive discussion about how to prevent the tax hike on the middle class.” He cautioned however, that he’s seen this play before and will “wait and see [if a deal] actually happens.”

I’m hopeful and optimistic,” Senate Minority Leader Mitch McConnell, R-Ky., said on the Senate floor today shortly after returning from the White House.

Senate Majority Leader Harry Reid, D-Nev, called the meeting “constructive” and “positive” and indicated that a deal can be reached between he and McConnell by the time the Senate returns to work Sunday afternoon.

The main sticking points still causing problems include the income thresholds that might see tax increases, as well as whether unemployment benefits would be extended again.

Others aren’t as optimistic that a deal can be reached. Any legislation would need to be voted on by Monday in order to avert the cliff, so something needs to happen in the next few days.  Both sides will be making their cases and negotiating through the weekend (as well as making their case to the voting public on the Sunday shows).

UPDATE 12/31/2012: According to the President today, a deal is “within sight“, but it seems likely they won’t make the midnight deadline.  They may have to make any deal retroactive if one is made.

President Obama said Monday, as the country hurtled toward the fiscal crisis deadline, that a potential agreement to prevent an imminent tax hike is “within sight” — but he cautioned it’s “not done” yet.   Congress is almost certain to miss the midnight deadline, after which tax hikes and sweeping spending cuts are set to go into effect. But lawmakers are at this point hoping to draft a deal, and perhaps retroactively address the tax increases that kick in starting Tuesday. 

It remains to be seen what form any deal might take, but it does seem like some provisions will expire, others won’t, and changes will be made. We shall see. Stay tuned for further updates.

UPDATE 1/2/2013: A fiscal cliff deal was passed late last night that will avert many of the tax rate increases, but will allow other cuts to expire (like the payroll tax cut) and raise rates on wealthier taxpayers.  Over 77% of taxpayers with earned income will see an increase in taxes in 2013 due to the bill passed last night.

there will be federal tax hikes in 2013. That’s because the legislation pushed through the Senate and House on Jan. 1 does nothing to prevent a temporary cut in the Social Security payroll tax from expiring. That means, under the agreement brokered by the White House and Senate Republicans, 77 percent of American households will be forced to fork over higher federal taxes in 2013. Households making between $40,000 and $50,000 will face an average tax increase of $579 in 2013, according to the Tax Policy Center’s analysis. Households making between $50,000 and $75,000 will face an average tax increase of $822. 

The main reason most households will see an increase in taxes is because the 2 percent cut in payroll taxes we’ve had for the past couple of years will be going away.  Tax rates for individuals making more than $400,000 and married couples making more than $450,000 will be going up as well.

Here is a more in depth look at what the effects of the fiscal cliff legislation will be.

Do you hope that congress will get a deal done before we go over the cliff?  What do you think is the right course of action for Congress and the president to take?

Last Edited: 7th January 2013

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    Share Your Thoughts:

  1. says

    I’d like to think our government representatives are smart enough and mature enough to come to a compromise that will avoid the fiscal cliff, but there seems to be no compromise at all in government these days. They are all more concerned with beating the other party into submission rather than doing what’s right for the country.

    If we do go over the cliff many families will be hurt. I ran some estimated numbers through the calculator and my numbers are similar to yours. With 3 little kids the reduction of the child tax credit would really hit me hard.

  2. says

    Peter, this is important stuff. It’s scary that taxes could go up by thousands of dollars for so many Americans who are already living on the edge of their own little fiscal cliff, so I hope Washington gets its act together and does something! Maybe we need an overhaul of the entire tax code… hmmm…

  3. says

    It’s unfortunate that congress cannot come to agreement. Each side is holding the other hostage and playing the blame game. However, I do believe our nations budget problems is not entirely a revenue problem, it’s a spending problem. Even if a deal gets done and taxes go up on anyone making $250,000 a year, it only raises $80 billion of revenue based on a $1.3 trillion dollar budget. Neither side wants to be blamed because of political reasons, but since Democrats have the upper hand, they can use the “class warfare” rhetoric and win the public debate.

  4. Ken says

    I am sorry but I do not want any compromise with current fiscal policies. How can we compromise with people who think we can borrow 45 cents of every dollar we spend and somehow that is OK? I do not have a blank check to buy what I want, neither should the government.

  5. says

    The solution is there – raise taxes and cut spending. Unfortunately our politicians and the president are more interested in the politics than the the outcome right now. My guess is we will go over the much over-hyped “cliff” in the new year, but then Congress will quickly reach a deal (since technically they will be cutting taxes and spending). All changes will be retro active to the beginning of the year so no one (other than the rich) will pay higher income taxes. Off course payroll tax credit holiday goes away so a 2% reduction in take home pay for a lot of us!

  6. says

    I have no idea what government to do, but it’s not what government does that ultimately affects your life – it’s how you handle money and what you do to with job/career/business choices.

    • Ken says

      Emily, As a Christian I understand that God is in control. But to say this ” but it’s not what government does that ultimately affects your life – it’s how you handle money and what you do to with job/career/business choices” is short sighted.
      As a missions pastor I travel the world quite a bit, and choices are exactly what many, many people around the world do not have due to government. Choices are not available to everyone like they are in America and most of the reason choices are not available is due to government. Freedom from government = more choices. More government, less choice. My concern is that choice is exactly what is being taken away from the American experience.

  7. says

    The problem is the spending. Putting more taxes on those that have a higher income is a tax on everyone because those with the higher incomes are the job producers. These tactics work because it brings the bad effects later for most people. The problem is that it makes a bigger mess in the end.

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