Financial writer Lori Montgomery in the Washington Post noted that almost 90 percent of American taxpayers will see their tax bills rise next year, to the tune of about $2,000 for middle-income households earning between $40,000 and $65,000 a year, if Congress does nothing about the fiscal cliff.
If you're like me, you've heard of the fiscal cliff, but you don't know exactly what it is. The term is shorthand for a series of federal spending cuts and tax hikes that will automatically go into effect on January 1, 2013, if Congress doesn't act to override them. These automatic measures originated in Congress last year as part of a compromise to pass the Budget Control Act of 2011.
The tax hikes include ending the temporary 2 percent reduction in the payroll tax (which funds Social Security), ending some tax breaks for business, changing the alternative minimum tax and inaugurating some taxes to start paying for the Affordable Care Act. They will also affect certain tax credits for low-income families, as well as the college tuition tax credit.
At the same time, budget cuts will go into effect for over 1,000 government programs, including $55 billion in defense cuts and $11 billion in lower Medicare payments. The White House detailed other spending cuts back in September.
Only you can figure out how the fiscal cliff will affect your personal situation. But financial experts say it will have a significant effect on the economy as a whole. They estimate the combination of tax hikes and spending cuts will slash half a trillion dollars off the national debt. But they will also cost an estimated 2 million jobs and will most likely throw the country into another recession. (Like we ever got out of the last one.)
Of course, there's still time for Congress to agree on spending levels and extend the Bush tax cuts, or some of them. Most people trust that Congress will act during its lame duck session, after the Presidential election. I guess we should all hope for the best, but prepare for the worst.