Who’s Most Vulnerable to the Fiscal Cliff?

by Emily Guy Birken · 3 comments

Woman overwhelmed by finances

It’s hard to avoid discussions of the so-called fiscal cliff that’s looming at the end of 2012. We can only hope that our leaders hammer out a compromise before the deadline. But if we do end up “falling off” the fiscal cliff, who will be most hurt by the changes? There are three groups that can expect next year to be quite financially painful. 

Are you among them?

Job-Seekers and the Unemployed

Because of the budget cuts to many different government sectors, there will likely be job losses after the fiscal cliff. Add to that the expectation that the economy will contract by 0.5% in the aftermath of the cliff (a prediction found to be conservative by many experts), and it will be even more difficult for a job seeker to find companies that are hiring.

And of course, those individuals who lose their job due to the cuts or contraction — or who are unemployed prior to the deadline — will have less time to collect unemployment benefits in 2013. Currently, unemployment benefits last for 99 weeks, but after January 1, the timeframe will revert back to 26 weeks.

Low-Income Families

The Earned Income Tax Credit (EITC) is an important benefit for families earning very little money. Until the end of 2012, low-income families receive a generous tax credit depending upon their income and family size. As the law currently stands, a childless couple earning $19,190 or less receives a $475 credit, while on the other end of the spectrum, a family with three eligible children earning $50,270 per year receives a credit of $5,891. This refundable credit also allows families to receive a refund even if they had no tax liability.

After the fiscal cliff, the EITC will be greatly reduced, which will seriously hurt the working poor. According to Suzy Khimm of The Washington Post, “Overall, if the tax breaks from the 2009 stimulus are allowed to expire—the EITC and Child Tax Credit expansions, along with American Opportunity Credit for college tuition—the poorest 20 percent of Americans would see their taxes go up by $209 on average, reducing their after-tax income by 1.9 percent, according to the Tax Policy Center.”

Considering the fact that the 2% social security tax break will also likely expire at the end of the year, low-income families are looking at a major reduction in their take home pay.

Families with Children in College

To help middle-income and lower-income families with the costs of college, the American Opportunity Tax Credit allows families earning $100,000 or less to deduct up to $2,500 per child in school expenditures, for up to four years. That tax credit is due to expire, leaving only the Hope Credit, which lowers the deduction amount to $1,800 per child, and reduces the term during which families can claim the credit to two years.

This means that next year, families will get $700 less in deductions for their child’s education — and can expect $6,400 less in deductions over the child’s four years of college. This could be a huge problem for many college students and their families.

The Bottom Line

There’s a reason why the upcoming tax changes have been named the fiscal cliff. Allowing these changes to go into effect all at once could seriously hurt the finances of many Americans.

Will any of these changes affect you? If so, how are you going to deal with them? 

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  • Donna says:

    Although it probably will not affect me since I am retired, it will continue to hurt my unemployed son who is living with me. He became unemployed when things plunged in 2008 and has done some freelance work but not enough to live on. I would be better off if he was working since I currently pay his student loans to keep his credit good. Otherwise, employers will use that excuse to not hire him. I am discussed with our politicians. I was a small business owner and also worked for a large corporation. The excuses the wealthy use to keep their taxes low are unconscionable. Never in my life have I seen such greed.

  • Martin says:

    I am now retired and have enough money coming in that I do not worry so much about the fiscal cliff very much. I only care about interest rates going up or down a lot. I own a lot of shares in high dividend stocks which are now looking risky since they go up and down now, often based on what may happen or fail to happen with the fiscal cliff. I am disturbed with the government now not compromising and passing their avoidance of the fiscal cliff.

  • Lance @ Money Life and More says:

    I don’t live paycheck to paycheck so even if we go over the cliff I will be able to survive and just change my budget. The unfortunate part is that my paycheck will get smaller and that makes me sad.

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