Explanation Of The Fiscal Cliff


If there is no deal reached between Democrats and Republicans by January 1, 2012, we will fall off the Fiscal Cliff.  We have been hearing much about this cliff during and following the Presidential Election.  But what does it really mean and what are the ramifications?  Quite simply, on January 1, 2012, the Bush tax cuts expire meaning we return to where we were prior to the tax cuts.  In addition, new taxes will be kicking in including an Obama Care tax and a raise in the ceiling of the social security tax.   If no deal is reached prior to January 1, the expiration of the tax cuts will unquestionably throw us back in to the grips of a recession for the following reasons.  1)  The lowest tax rate will increase from 10% to 15% and a person earning $60,000 a year would now top off at 28% as opposed to the current 25%.  2)  The return of the marriage tax penalty.  Currently, married couples enjoy relief from the penalty through a larger standard deduction.  If the Bush tax cuts expire, we return to the marriage penalty.  3) Those with children can now claim a $1,000 deduction per child.  If tax relief expires, the deduction for each dependent child returns to $500.  4)  Capital gains taxes will increase. 5) Dividends will lose their favorable tax treatment meaning dividends would be taxed at the income tax rate.  That top rate would be 39.6%.  6) The payroll tax holiday will end, meaning the social security tax will return to 6.2% of taxable income from the current 4.2%.  In addition, the ceiling for which a person pays in to social security will rise to $113,700 from $110,100.  7) The student education tax credit would return to $1,800 from the current $2,500. 8) The estate tax would apply to assets over $1 million from the current $5.12 million dollars.  And the estate tax itself would increase to 55% from 35%.   All of the above mentioned issues will result in one major crisis.  People will have less disposable income so they will either spend less or reverse the current trend and begin living off credit.  It will have disastrous effects on the economy; no credible economist dispute that.  It would be a crisis from which it would be difficult to recover.  Therefore, Republicans and Democrats must reach a deal prior to the stepping off the cliff.  There is no other alternative.

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