Have you ever leaned over the edge at the Grand Canyon or Niagara Falls? It looks like a long drop, but, unless you throw a rope to see if it hits bottom, you may never know how far down it is. Hopefully, no one in Washington suffers from vertigo as they edge closer and closer to the brink of our own "fiscal cliff."
So what does the term "fiscal cliff" actually mean? I'll summarize, then offer some tools to help you understand the impact it could have on your wallet.
According to Wikipedia, the fiscal cliff is "a newly coined term referring to the effect of a number of laws that (if unchanged) could result in tax increases, spending cuts, and a corresponding reduction the US budget deficit beginning in 2013."
Let me translate that.
There is likely a tax increase waiting to help you ring in the New Year. It will be caused by the expiration of existing tax cut (often called the "Bush Era Tax Cuts), changes to the Alternative Minimum Tax thresholds, implementation of the Medicare Sustainable Growth Rate, expiration of the 2% Social Security payroll tax cut, and the end of extended federal unemployment benefits. Oh, and add in a dash of federal discretionary program spending cuts and new taxes.
There you go -- a tidy little package that could bring on another extended recession that lasts like a nasty case of the flu.
Conservatives at the Heritage Foundation state that the “sweeping pro-growth tax and spending reform road map designed to grow the economy and restructure entitlement programs to provide real economic freedom and long-term security for the American people” should endure and not be tampered with.
Liberals and progressives at The Center for American Progress call for replacing current standard exemptions and deductions with a "standard credit," while asking those in the upper income brackets to pay more.
If you are interested to see how these various outcomes might impact you, Business Week recently compiled a list of “fiscal cliff” calculators from various websites. The simplest to use and understand is CreditCards.com’s Fiscal Cliff Calculator. But those looking for a more in-depth calculation can try out the Tax Foundation’s “MyTaxBurden Tax Policy Calculator.”
Perturbed by the results?
How will the fiscal cliff impact your financial situation? Share the results of your calculation by leaving a comment below.