The "fiscal cliff" describes the meeting of two events Dec. 31 -- the expiration of almost every tax cut enacted since 2001 and a scheduled reduction in government spending.
Analysts liken it to falling off a cliff, hence the name "fiscal cliff," where the two events combined would cause financial hardship for 90 percent of Americans in one way or the other and send a shock through the U.S. economy.
Fiscal Cliff coverage: http://www.wkyc.com/money/economy/fiscalcliff/default.aspx
Most likely, 90 percent of Americans would see their taxes rise and the average American would see their tax bill rise by $3,500 in 2013.
Some of the cuts that would expire are the ones that lower income and payroll taxes and limit the Alternative Minimum Tax.
In addition, large amounts of monies would be cut from the government budget, reducing spending on defense and lowering some government benefits.
In August, 2011, Congress and President Obama promised to reduce the nation's deficit by 1.2 Trillion dollars over 10 years. They passed a law that cuts spending across the board on January 1, 2013, unless they agree to an alternative.
That "average" increase of $3,500 would vary among income levels:
- For the lowest 20 percent of income earners, the removal of the 10 percent bracket and changes to the child tax and earned income credit will raise the average tax bill by $412.
- For the middle 60 percent, the increase to the payroll tax rate and expiration of the Bush-era tax cuts will raise taxes by an average of approximately $2,125.
- And for the top 20 percent, the return of the dividend rate from 15 percent to 39.6 percent, and the effects of Obamacare, they will experience an average tax increase of $14,173.
- The top 1 percent will see an average tax hike of $120,537.
Here are the cuts that are actually set to expire, according to the Tax Policy Center:
Bush-Era Tax Cuts: This includes the return of the current 10/15/25/28/33/35 percent individual tax rate brackets to the pre-2001 rates of 15/28/31/36/39.6 percent, the return of the tax-rate on long term capital gains and qualified dividends from 15 percent to 20 percent and 39.6 percent, respectively, and the return of the limitation on itemized deductions and phase out of personal exemptions.
Obama-Era Tax Cuts: On January 1, 2013, several provisions that benefit the lower classes -- most notably the increased child tax and earned income credits and the expanded education credits -- are slated to expire.
The Estate Tax: The estate tax exemption and tax rate are currently at $5,120,000 and 35 percent, respectively. Come January, they will return to $1,000,000 and 55 percent.
Expiration of the Alternate Minimum Tax patch: The most recent patch raised the AMT exemption for 2010 and 2011 from $45,000 to $74,450 for MFJ. In 2013, this will reset to $45,000, pulling tens of millions of taxpayers into AMT.
Temporary Payroll Tax Cut: For 2011 and 2012, the employee's share of Social Security tax was cut from 6.2 percent to 4.2 percent. This rate cut expires at year end.
Obamacare Taxes: Starting in 2013, taxpayers earning more than $250,000 will pay an additional 0.9 percent tax on their wages and 3.8 percent on their unearned income (interest, dividends, capital gains.)
Extenders: There are many provisions set to expire at year's end that regularly do so, before Congress retroactively resuscitates them. Foremost among the "extender" provisions are the R&D credit and the personal deduction for state and local income taxes.