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Fiscal Cliff: What Really Happens If We Go Over It

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Fiscal Cliff


NEW YORK -- If lawmakers cannot agree on how to address the pending "fiscal cliff," $7 trillion worth of tax increases and spending cuts will begin to go into effect in January.

The smart money says Congress won't come close to an agreement before the November election, and that lawmakers may not even be able to reach one until early next year. At that point, of course, they'd need to undo at least some of the tax increases and spending cuts that went into effect.

In the meantime, uncertainty about just what Congress will do will weigh on the economy.

Here's a rundown of what happens if lawmakers fail to act before Jan. 1, 2013.

Automatic spending cuts


Since Congress has failed to reach a bipartisan debt-reduction deal, the Budget Control Act requires automatic spending cuts to commence on Jan. 2 that will amount to $1.2 trillion in deficit reduction over 10 years.

Defense: $55 billion will be cut in 2013 from projected levels of discretionary defense spending. That translates into at least a 10% cut to every program, project and activity that's not explicitly exempt.

Nondefense: $55 billion will be cut from projected levels of domestic discretionary spending, which includes everything from education to food inspections to air travel safety. Budget experts estimate the cuts will result in at least an 8% cut to programs, projects and activities.

Bush tax cuts


The Bush tax cuts, the eternal partisan trip-wire, are all set to expire Dec. 31. As a result:

Income tax rates: Rise to 15%, 28%, 31%, 36% and 39.6%, up from 10%, 15%, 25%, 28%, 33% and 35%.

Capital gains rate: Rises to 20% from 15% for most filers.

Qualified dividend rate: Rises to one's top income tax rate, up from 15% for most filers.

PEP/Pease limitations: Restored. High-income households may not be able to take some itemized deductions and personal exemptions in full.

Child tax credit: Falls to $500 per child from $1,000. The refundable portion also reduced.

American Opportunity Tax Credit: Expires. The lesser value HOPE tax credit for college tuition is reinstated. Several smaller education tax benefits also expire.

Earned Income Tax Credit: Expansion of eligibility for the credit expires.

Marriage penalty relief: Expires. Effectively that means a low- or middle-income two-earner couple will owe more to the IRS than they would if they were single making the same income.

Estate tax:
Parameters revert to pre-2001 levels. The exemption level falls to $1 million from $5 million; and the top tax rate on taxable estates rises to 55%, up from 35%.

AMT patch


Won't be renewed. Income exempt from the Alternative Minimum Tax in 2012 -- for which taxpayers will file returns next year -- falls to $33,750 for individuals and $45,000 for married couples. That's down from $50,600 and $78,750, respectively, if the exemption amounts had been adjusted for inflation.

As a result more than 30 million people will be hit by the so-called "wealth" tax, up from 4 million to date. (Related: Missing the big picture)

A bipartisan bill from the Senate Finance Committee proposes a patch for 2012 and 2013 but it has not passed the Senate or House yet.

Payroll tax holiday


Expires. The Social Security tax rate reverts to 6.2%, up from 4.2%, on the first $110,100 in wages. Effectively, someone making $50,000 will pay another $1,000 in payroll taxes next year.

Unemployment benefits extension


The federal extension expires. That means workers who lose their jobs after July 1, 2012, will only receive up to 26 weeks in state unemployment benefits, down from as many as 99 weeks in state and federal benefits that had been available until recently.

More From CNNMoney

Tax extenders


A host of smaller individual and business tax breaks will have expired. A bipartisan bill from the Senate Finance Committee proposes to extend many of them, but it has not passed the Senate or House yet.

Medicare doc fix


Expires. Medicare payment rates for physician services drops by 27%.

Other


Some budget experts count as part of the fiscal cliff the onset of a new Medicare surtax on high-income households under health reform.

But unlike the other fiscal cliff tax provisions, the new tax was not written into law as a wink-wink "temporary" provision. It is, however, included to reflect the magnitude of tax increases set to take effect simultaneously in 2013.

A 0.9% surtax will apply to wages on earned income over $200,000 ($250,000 if married). That's on top of the 1.45% Medicare currently owed on all wages. Those making between $200,000 and $500,000, for instance, will only pay about $633 extra while households making $1 million or more would pay another $11,242.

A 3.8% Medicare surtax will also apply for the first time to at least a portion of high-income households' investment income.


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chris1011

New Study: Bush Policies, Not Obama, Responsible for US Deficit
8/6/2012
Romney repeatedly accuses the president of “runaway spending” and of “creating a prairie fire of debt.” While one in depth study shows that spending under Obama never happened, a new study reveals that Bush-era policies are primarily responsible for our burgeoning deficit.

This past Thursday, the Center on Budget and Policy Priorities (CBPP) analysis revealed that the Bush tax cuts, the wars in Afghanistan and Iraq, and Bush’s Great Recession account for virtually the entire federal budget deficit.

http://veracitystew.com/2012/08/06/new-study-bush-policies-not-obama-responsible-for-us-deficit/

August 09 2012 at 3:48 PM Report abuse +1 rate up rate down Reply
1 reply to chris1011's comment
tj1108

Bush was the most progressive spending president in history. Most of his policies create massive debt. Its difficult to believe that Obama's single stimulas of 857billion did not put his budgets deficits beyond Bush. The biggest problem is we are moving in the wrong direction and excellarating. If Obama was a Goverment cutting president by just .001% he would have us moving in the wright direction, but he is a 100% goverment control president. He will overtake Bush on in his second term when the massive Obamacare is full implemented.

August 10 2012 at 11:08 AM Report abuse rate up rate down Reply
jhrooney

The press will have a field day with Taxagoddon, just like they did with Y2K., If you take all the media says including this author mulitply 50% you come out pretty close to accurate. Oh well, lots of hyperbole on this between now and January 1.

August 07 2012 at 4:12 PM Report abuse rate up rate down Reply
star95presson

Good day to all

As time permits please go to the link below, I believe after youʼve read the article and possible forthcoming financial events, you might consider writing your elected official in Washington D.C. Feel free to let them know youʼre displeasure in their lack of work and or concern on their part for these serious pending issues, i.e. Congress should not believe they will have a job if this occurs! Additionally they should not count on having a job either.

For proverbially kicking the can down the road to create drama in an election period and for sitting with their hands / fingers in dark place, while no other employer would stand for it. Why should we? Terminate their contracts agreements whatever they think they have and send these miserable lowlife pathetic worthless bastards packing down to the local unemployment offices where a warm welcome should be waiting. Because this will impact us all, but you can bet it wonʼt hurt these people if can call them that before we pray.

August 07 2012 at 3:25 PM Report abuse rate up rate down Reply
billhalenbek

Until drastic measures are taken, it ain't gonna get solved. I'm betting on the latter.
Don't plan on having extra money if you aren't rich. Plan ahead. Good luck with that.

August 07 2012 at 3:09 PM Report abuse rate up rate down Reply
rcwcfa

And people wonder why I moved to the Caymans. By filing form 2555, the first $95000 of income for each spouse is not taxed,

August 07 2012 at 2:52 PM Report abuse rate up rate down Reply
donut999

Everything in this article is needed. Spend less, raise some revenue. Is there some other way out of this mess? Unintentially, the gridlock and political in-fighting has us right where we need to be. Politics at its' worst creating government at its' best.

August 07 2012 at 10:34 AM Report abuse rate up rate down Reply
johncworth

These numbers are so mind-boggling that I cannot get to grips with what it all means. Beam me up Scotty!

August 07 2012 at 7:24 AM Report abuse rate up rate down Reply
ggala59

Clinton had a nice balanced budget. Hire him back!

August 07 2012 at 3:57 AM Report abuse +1 rate up rate down Reply
jkcow

When are we going to learn that both parties caused this mess. The old dogs spent more money than we had coming in for 50 years plus. Every congress person that has been in office for 12 years or more need to be voted out. This will take awhile to accomplish. We need to start with this election!

Unfortunately we the working class have to pay this debt back. Tell them we have had enough! Vote every lifer out from both parties.

August 06 2012 at 9:18 PM Report abuse +6 rate up rate down Reply
Setanta

hope those LOTTERY WINNERS can understand this bs.
same for anyone selling property.....inheriting property.....etc etc

August 06 2012 at 8:48 PM Report abuse -5 rate up rate down Reply