Will We Fall Off The Fiscal Cliff in 2013 – Impacts on Your Taxes and Finances

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The Washington Post had two graphics that neatly summarize the impacts from the fiscal cliff. This is the number one topic in the world of finance and almost all Americans will be impacted by the potential fallout in some fashion. My opinion is that Congressional Republicans and the Obama administration will reach some form of deal by year-end to avert falling off the so called fiscal cliff. Because if they don’t the potential consequences from the loss of consumer and business confidence could be dire to an already fragile economy.

What is the Fiscal Cliff? It is basically a set of tax hikes and spending cuts that will go into effect if Congress and the re-elected Obama administration don’t compromise and get their act together. If we go over the “fiscal cliff” at the start of 2013, federal income tax rates will return to the higher pre-Bush tax cut era levels (see potential 2013 rates), the FICA payroll tax credit holiday disappears, federal long-term unemployment benefits go away and people who lose their jobs in 2013 will only be entitled to 26 weeks of state unemployment benefits. Medicare reimbursements to doctors will also get cut and because the debt ceiling stays the same the government will be forced into taking sequestration measures which means across-the-board government spending cuts, including a $55 billion (9%) cut to the defense budget.

The graphic below shows how the fiscal cliff tax hikes and expiring tax breaks will impact groups based on their income levels.  As expected, it will affect wealthier Americans differently (and to a larger extent) than lower-income Americans. The Bush-era tax cuts, or 2001-03 low/middle income tax cuts in the graphic, are by far the largest component of the fiscal cliff.

Fiscal Cliff components - 2013 Taxes That May ChangeThe increase in marginal tax rates in relative terms though will hit low income earners the most since America has a progressive tax system. In fact in percentage terms the lowest income earners will see a nearly 65% increase to their marginal tax rate.

Other good articles from around the web on the fiscal cliff are listed below:

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7 Comments on "Will We Fall Off The Fiscal Cliff in 2013 – Impacts on Your Taxes and Finances"


Government Shutdown Impacts – Will Social Security Benefits, Contractor and Federal Employee Pay Checks Stop? | Saving to Invest
Monday 9:42 am

[…] another government shutdown at the end of the 2013 fiscal year and sit on the edge of yet another fiscal cliff as the government reaches its borrowing limit in October. Stock markets are already getting […]

robert
Friday 10:27 pm

what will happen is the President and Democrats will ask for taxes to be increased only for those making 250 k or more… and they will win on this for there are enough Republicans in the House to vote for this .. Tea Party Republicans will be diminished next year 13 of then either lost or retired in 2012….everything else will be negotiated.. when they return in January 2013

[…] Will We Fall Off the Fiscal Cliff in 2013? [Saving to Invest] Wondering what impact the so-called fiscal cliff could have on your household in? I know I have, but I’ve had a tough time finding specific numbers. That’s why this post caught my attention. It breaks the numbers down based on your household income, making it easy to understand exactly what’s at stake. […]

[…] Obama administration has confirmed its position regarding the fiscal cliff with the release of it’s latest report, The Middle-Class Tax Cuts’ Impact On Consumer […]

[…] are set to expire. The expiry of these tax cuts, credits and deduction is being referred to as the Fiscal Cliff. Meanwhile, with U.S. government debt soaring as the result of stimulus spending to rescue the […]

[…] and Wealth Planning Guide, which provides the following factors to consider in light of the looming fiscal cliff, tax uncertainty and potential changes in 2013. I like the way the authors of the report suggest […]

Tuesday 9:38 pm
According to TurboTax Vice President and CPA Bob Meighan , Here’s what people need to know about the pending tax law changes: • Alternative Minimum Tax (AMT) Patch – Today the AMT usually hits taxpayers who have a household income over $75K and are married with more than two kids. However, unless the AMT is patched by the end of the year, an estimated 26 million households will face the AMT for the first time. This threatens to add an average of $3,700 to taxpayers’ bills for the current tax year. That said, historically Congress has patched the AMT every year since 1969 without fail. • Tax Extenders – The “Tax Extenders” refer to a broad set of temporary tax laws. Here is a short list of the higher-impact deductions and credits that are included in the “Tax Extenders” package currently on the table: – Educator Expense Deduction: This is… Read more »
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