We’re About to Go Off the Fiscal Cliff — Now What?

Financial Planning

We are just days away from tax increases for many Americans. Here’s what might happen to your take-home pay, taxes, and other parts of your financial life if (or when) we go off the so-called “fiscal cliff.”

Take-home pay

While several key tax breaks expire on Dec. 31, the changes probably won’t impact the first paychecks of the new year. That’s because payroll processors are still waiting to hear from the Treasury regarding 2013 tax withholdings.

Until they do, they’ll use 2012 tables. New tables reflecting higher rates could be issued any time, however.

But even if 2012 rate tables remain in place, there’s something else that might shrink your take-home pay: Social Security.

For the last two years, we’ve only had 4.2 percent of our wages withheld, rather than the traditional 6.2 percent.

Starting Jan. 1, that break expires and we’re back to 6.2 percent again, at least on earnings up to $113,700. So if you gross $50,000 annually, you’ll take home $1,000 less in 2013.


While fiscal cliff-related tax hikes pertain primarily to money earned after Jan. 1, 2013, there’s one provision that could affect your 2012 return: the expiration of protection from the Alternative Minimum Tax.

According to the IRS, without a fix, up to 100 million taxpayers may not be able to file until late March, delaying refunds. In addition, joint filers earning more than $45,000 and single filers earning more than $33,750 could be hit with higher taxes on 2012 income.

If the fiscal cliff remains unresolved, there’s a plethora of potential tax hikes ahead. I won’t rehash them all here, primarily because I remain hopeful that at least some compromise will ultimately be reached.


If Congress doesn’t act before year-end, the federal extension of unemployment benefits will expire.

That means those who lost their jobs after July 1, 2012 will only be eligible to receive 26 weeks in state unemployment benefits, rather than up to 73.

As a result, more than 2 million of the long-term unemployed could lose benefits next week.

Your investments

If you’ve got stocks in a retirement plan or elsewhere, the fiscal cliff could wreak havoc on your portfolio. The reason is simple: Companies make money when people buy things.

When consumers pay more taxes, they have less to buy things with. Combine reduced consumer spending with slashed government spending and you have an environment where companies from department stores to defense contractors will be less profitable.

When profits drop, stocks drop.

How worried should you be?

The stock market can be a barometer of what’s ahead economically. What’s it suggesting now about the fiscal cliff? Because the market has been holding up well – it’s up nearly 13 percent this year – the implication is the fiscal cliff is likely to be resolved.

But keep an eye on the market, and the news. It’s unlikely the worst-case scenario will unfold, but it is likely the ultimate deal will affect you.

We’re About to Go Off the Fiscal Cliff — Now What?” was provided by MoneyTalksNews.


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