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Are You Headed Toward the 2013 Fiscal Cliff?

Fiscal Cliff: What it is and why you should care.
(Photo by Tim Boyle/Getty Images)

If you listen to the news at all you’ve probably heard that the US is headed toward a “Fiscal Cliff.” So what exactly does that mean and how will it affect you and your family? The Fiscal Cliff contains a lot of government programs that are both starting and ending that will have a profound effect on your take home pay and future taxes in the years to come.

Programs Coming and How They’ll Affect You

Obamacare or The Patient Protection and Affordable Care Act (PPACA) has a host of new taxes that will affect your paycheck in 2013. For example, The Medical Device Act will impose a 2.3% tax on companies that produce medical products from pacemakers to prosthetics, regardless of the profits, or lack thereof, of the company producing them.

Also on the horizon is an increase in your Medical Deductions. Currently you can deduct 7.5% of your AGI (Adjusted Gross Income) if you spend that much on doctors, hospitals, drugs or medical care. That’s going to go up. So for seniors you are going to have to spend 10% of your income, 2.5% more, on healthcare before you can deduct a dime.

This summer the Supreme Court decided that instead of an individual mandate, that everyone has to buy health insurance, was instead ruled a tax, and will be collected on your individual tax return.

Programs Leaving and How They’ll Affect You

Current laws that are scheduled to go into effect in 2013 could have a very adverse effect on your family income. While higher taxes on the rich and spending cuts that are scheduled to go into effect would reduce the deficit by a very small $560 billion, the Congressional Budget Office estimates these laws could reduce the GDP (Gross Domestic Product) by as much as four points. These laws would also trigger a rise in unemployment of at least one point. That could result in a loss of two million jobs and keep unemployment in 8% territory. If both are true, we are looking at another recession.

Leaving would be the Bush Tax cuts and that would increase every tax rate, for every tax payer, unless congress makes changes. Look for the expiration of $125 million in take home pay from the President’s Payroll–Tax Holiday. Forty million from the expiration of emergency unemployment benefits and $98 billion in automatic cuts from the Budget Control Act.

Taxes

Beginning in 2013 all tax brackets are going up. The lowest 10% bracket is being replaced with the new and improved 15% bracket. So the poorest Americans are going to immediately be taxed an additional five percent on their very first dollar.

Last year congress passed a reduction in the amount of payroll withheld for social security. Employees have been taking home an additional 2.6% in pay. That’s going away. Add in the end of some business tax breaks, changes to the Alternative Minimum Tax that will begin affecting lower income brackets, and cuts in defense and Medicare. Automatic cuts are going to have some effect on over 1,000 government programs. More than likely one or more of them will affect you.

What Options Are Available?

Congress has at least three candles on top of the cake they can light. First, they can do nothing and let everything go into effect. This would most likely cause another recession. The up side is that the deficit would be cut in half as a percentage of GDP. Not sure the trade-off would be worth it.

Second, they could “kick the can down the road.” They could rescind some or all of the taxes and spending cuts that would increase the debt and deficit. And put us on a course to be the next Europe. This is likely the path they will take because it’s politically expedient in an election year.

The third option would be to actually write and pass a budget and live within it. I doubt that option will even be remotely considered.

Some Final Thoughts

The other thing to keep in mind is QE3. The Federal Reserve is going to spend $4 billion a day buying mortgages for as long as it takes to improve the economy. What effect this will have on the economy between now and January is anyone’s guess. So far, no stimulus package has had any appreciable effect on the economy, housing or unemployment other than to keep them all in some kind of limbo.

Our leaders are dealing with unfathomable amounts of money. We are truly in uncharted territory. Much of the fate of the world depends on what we do in the next few months and our leaders are playing politics instead of taking care of business. Sooner or later, some, or all of us, are going to feel some economic pain. Sacrifice is inevitable. No one wants to lose his or her sliver of the economic pie. But because of that, we may be in danger of losing the entire pie.

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