How the Fiscal Cliff Could Affect You

by AJ Pettersen · 3 comments

Looking out over the fiscal cliffWith the US Congress in a fuss over financial changes scheduled for the beginning of next year, the “fiscal cliff” is approaching. The left and right cannot seem to agree on what’s best for the country, so changes seem unavoidable.

This set of changes would affect federal spending and tax laws, and in turn, nearly every American.

Here’s how the fiscal cliff could affect you:

Tax Rate Changes

The Bush-era tax cuts are set to expire on January 1, 2013. The average American family makes around $50,000. This year, they’ll pay 10% of their earnings up to $17,400, and 15% between $17,400 and $70,700. When the tax cuts expire, they’ll instead owe 15% on ALL of their income. Though this jump in taxes isn’t huge, it’s enough to put a burden on the average family.

Tax Deductions

The tax burden increase doesn’t include tax credits, which will also be affected by the approaching changes. The child tax credit will be lowered from $1,000 to $500 per child, and the current college tax credit will expire, leaving families to pay thousands more for each child’s higher edcuation.

If you receive an estate after the changes are in place, you’ll see a lower exemption and higher taxes. Rather than the current $5.12 million exemption and 35% tax for anything over that, the exemption will drop to $1 million with a 55% rate for anything above. This means that, after the changes, those receiving the current exemption ($5.12 million) would see over $2 million extra taken in taxes.

Capital gains taxes will rise from 15% to 20%, which will affect your return on investments.

The Social Security tax holiday currently gives citizens a 2% cut, up to $110,000. This will run out and cause families to pay up to $2,200 more each year.

Changes to the Earned Income Tax Credit will have a huge affect on lower income households. Its reduction will mean an increase in the Social Security payment burden on poor families.

Government Spending

If no solution is found, 2013 will also bring a number of government spending changes. A number of departments will see large cuts, leading to programs being scaled back or terminated completely.

The defense budget will immediately be reduced by $55 billion in 2013, leading to a number of people losing their jobs.

The Federal Aviation Administration would see a $1 billion cut to their budget. This could lead to more delays at airports and the loss of air traffic controller jobs.

Most importantly, unemployment benefits will fall from 99 weeks to 26 weeks, causing great difficulty for the high number of unemployed workers.

How Does This Affect You?

Undoubtedly, going over the fiscal cliff would affect you in some way. You could see tax increases, or budget cuts in the workplace.

If you’re concerned, there are a few things you can do to prepare. The capital gains tax increases could make a big difference for your investments. If you are able, taking out gains at the current rate may not be a bad idea. Researching estate management techniques, and/or shuffling it around and gifting some of it before the New Year may also be a good decision, as large estates will see significant changes with the approaching tax code modifications.

Overall, you should be ready for the looming changes and be prepared for what it could mean for you and your family.

How are you preparing for the fiscal cliff?

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  • Shane says:

    It has affected many I know and not in a good way. It is unfortunate that they can’t get together and make the decisions that need to be made.

  • Steve says:

    I would love to agree with Andy on this but after seeing what Congress did with the Debt Ceiling and America’s credit rating this year, it doesn’t leave me with much hope in our government. I do believe this “fiscal cliff” is a much bigger and more important issue than the debt ceiling, so I just hope something is done before January 1st. If not, then this might be the first time I won’t be looking forward to ring in the new year.

  • Andy says:

    Personally I think that Congress will reach a resolution around the tax cuts at the end of the year or early in the new year. However the ones that are likely to dissapear include the social security (payroll) cut. Cap gains is also likely to rise.

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