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Five things to fear most about the fiscal cliff

December 24, 2012 by Scott Bomboy


If politicians can’t agree on a fix to the current fiscal cliff situation in Washington, you’ll likely be missing a few thousand dollars from your paycheck next year. Here’s a quick guide to five fiscal-cliff outcomes that could directly affect you.


The fiscal cliff is the expiration of tax cuts made since Bill Clinton’s presidency combined with mandated spending cuts that will help lower the nation’s annual borrowing deficit.


The spending cuts are known as the sequestration and reduce government spending on defense and social programs across the board.


In the long run, some economists think the cliff would actually benefit the American economy, because it would cut back on borrowing by the federal government.


But the immediate fear is that throwing the brakes on taxes and spending will trigger another short-term recession.


Why? Quite simply, if Americans have to spend more on paying taxes and others are unemployed, overall spending drops on goods and services.


Here are the five core issues that you may be able to identify with, outside all of the debate in Washington.

1. All taxes go up

A broad series of temporary tax cuts that started in the administration of President George W. Bush and continued into the Obama administration will stop. For the average family, it will be like getting a 4 percent pay cut in your annual household income.


Income taxes would go up, payroll taxes would go up, and estate taxes and dividend taxes would go up. And there is a new tax to pay for the Affordable Care Act.

2. The Alternative Minimum Tax: Public enemy number 1

The Alternative Minimum Tax or AMT is basically a troublemaker. Few people understand it, but it will appear on your next tax return as an unwanted guest.


The original AMT was designed in 1969 to make sure richer people paid some taxes. However, it didn’t account for inflation, so the AMT thinks most of America is rich, which is why the AMT needs to be corrected each year.


The AMT would increase taxes for 60 million additional people and usually, Congress finds a way to pass an annual “patch” so most people don’t pay the AMT.


But this year, the AMT is a casualty of the political fight in Washington.

3. You may not be able to file a tax return for awhile

Because of the AMT, the IRS is in a tizzy about the fiscal cliff.


Acting Commissioner of the IRS Steven Miller says most taxpayers can’t file their 2012 tax returns until late in March of 2013, or even later, as long as the AMT issue isn’t resolved.


In fact, the IRS said as many as two-thirds of Americans may be unable to file taxes—100 million out of 150 million tax paying households.

4. Unemployment benefits up in the air

An estimated 2.1 million jobless Americans will lose their federal unemployment aid after January 1. These are people who have been out of work for more than six months.


The Congressional Budget Office (CBO) said in December an extension of benefits would cost the government nearly $30 billion. But it would also help keep people in the job market and keep them in the economy as consumers.


And if the sequestration does go into effect, there will be layoffs of government employees at some point if the stalemate continues.


A report from George Mason University estimated a projected 14 percent reduction in the government workforce.


“As a consequence of sequestration, GDP growth in 2013 will be reduced by two-thirds and unemployment will increase by as much as 1.5 percentage points raising the current national rate above 9 percent. These are the easily measured impacts,” the report said.

5. Stock market reaction could be the key

If the global markets get too nervous about the fiscal cliff, it could force lawmakers to compromise quickly, and at least reach an agreement on tax cuts and basic spending.


But how much damage needs to be done to consumers first? The majority of Americans still have some type of investment in the market, directly or in a retirement fund.


So far, the markets have winced as politicians battle in Washington, but there hasn’t been significant drama , like a 1,000-point drop in the Dow.


One reason could be that investors still believe the GOP and Democrats will find a solution in the next 10 days. Or they’ve already priced that into stocks.


Lurking in the background is the expiration of the debt ceiling in February. Markets didn’t like it when Moody’s downgraded the U.S. after the 2011 debt debacle.


If you see your retirement funds drop in value, as the tax hit comes in from the fiscal cliff,  that’s a double whammy that has long-term implications.


Scott Bomboy is the editor-in-chief of the National Constitution Center.


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