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What Exactly Is The Fiscal Cliff?

Money Matters Corner:  by Kenneth D. Stephenson

What Exactly Is The Fiscal Cliff?

  1. The expiration of almost every tax cut enacted since 2001.
  2. A reduction in government spending first proposed during the 2011 Debt Ceiling Crisis called the Budget Control Act of 2011.

These measures were designed to help balance our budget deficit; however, if enacted, they will more than likely begin to slow the U.S. economy.

The Federal Reserve Board Chairman Ben Bernanke defines the Fiscal Cliff as the many major fiscal events that could happen simultaneously at the close of 2012 and the dawning of 2013.

The Tax Provisions that will expire on Dec. 31st, 2012, should we fall over the Fiscal Cliff include:

 Changing the current individual tax rate brackets (10%-15%-25%-28%-33% and 35%) to the pre-2001 rates of 15%-28%-31%-36% and 39.6%.

 Returning the tax on Long term capital gains and Qualified dividends from 15% to 20% and 39.6%, respectively, and the return of the limitation on itemized deductions and phase out of personal exemptions.

 On January 1, 2013, several provisions that benefit the lower classes, including the increased Child tax and earned income credits and the expanded education credits, should expire.

 The Estate tax exemption and tax rate are currently at $5,120,000 and 35%, respectively. Come January, they will return to $1,000,000 and 55%.

 The AMT exemption for 2011 of $74,450 for married couples filing jointly will reset to $45,000, pulling tens of millions of taxpayers into AMT.

 For 2011 and 2012, the employee’s share of Social Security tax was cut from 6.2% to 4.2%. This rate cut expires at year end.

 Starting in 2013, taxpayers earning more than $250,000 will pay an additional 0.9% tax on their wages and 3.8% on their unearned income (interest, dividends and capital gains).

If all these tax increases and spending cuts take effect; the grand total being in the region of $7 trillion over a decade, the government could save nearly $600 billion starting next year. However, the same measures would reduce U.S. GDP by an amount which may plunge the economy into recession. As a result, the slow but steady economic growth of the last three years may be replaced by contraction.

Kenneth D. Stephenson owns and independent financial advisory firm, Complete Financial Solutions, Inc. He can be reached at 919-552-4286 or you can email him at Please feel free to send in questions for future columns.

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