The Fiscal Cliff has caused much excitement and concern in the later part of 2012. It is important to understand the “Fiscal Cliff” is used to explain what will happen to us financially on Jan. 1, 2013, if Congress does not take action. It is most easily understood in three primary areas:
- Tax Cuts Expiration
- Tax Increases
- Spending Cuts
The first area – Tax Cuts – includes the expiration of both the payroll tax cuts and the Bush Era tax cuts. The Bush Tax Cuts were set to expire previously but extended to help buoy up the economy. As of 2013 they will automatically be done away with along with the payroll tax cuts. The expiration of these taxes will have the most immediate effect upon the economy and the citizens’ bank accounts.
Second is the tax increases. All households in America will experience a 3-5% income tax increase on their annual income tax returns. Additionally, the capital gains tax rate increases from 15% to 20%, and the 3.9% Obamacare tax on investment income goes into effect.
This are the mandated spending cuts. The effect of these tax cuts is expected to be near $550 BILLION. These cuts will come from a large variety of programs and government offices, but the cut in spending, and loss of jobs (more than 2 million) will be felt throughout the economy.
By all accounts, going over the fiscal cliff will put the country into another recession – almost immediately. The reality of it is there is and will continue to be plenty of politicking by both the Right and the Left. It is likely this will spill into 2013; however, it is my belief a deal will be reached and applied retroactively largely negating any of the fear created by the impending drop off the cliff. The drop over the cliff amounts to little more than both sides using it as a “fear-mongering” ploy to make the other side blink first.
To find out how the Fiscal Cliff applies to you, call and schedule a FREE LEGAL consultation with an attorney at Wells Law Group — 480.428.3290.