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What the Fiscal Cliff Deal Means for Your Wallet

Original Article Updated January 8, 2013

As many of us were toasting in the New Year, lawmakers in Washington, DC were pushing legislation through Congress that prevented American taxpayers from falling over the proverbial “fiscal cliff.” Their last-minute maneuvering enabled President Barack Obama to sign H.R. 8, the American Taxpayer Relief Act” into law on January 2, 2013, and delay a probable economic recession, higher unemployment rates, and other negative financial repercussions.

While the legislation offers a lot of good news for middle-class Americans and saves them from tax hikes they could have felt; the wealthy are now seeing tax increases and Washington still has work to do in terms of agreeing on a balanced budget. H.R. 8 gives lawmakers two months to identify new spending cuts and sources of income and agree on a balanced budget. This is an important next step in addressing our nation’s growing deficit (e.g., the amount government overspends that exceeds income from sources like taxes and borrowing).

So, yes, if you’ve heard that the middle class has been spared, that’s mostly correct. Outlined below are those key benefits. But there’s one thing you should be aware of. You probably received a paycheck in 2013 that is lower than your last paycheck in 2012. If you’re wondering why, here’s what happened: for the past two years, you’ve been paying 4.2% of your income in Social Security taxes, a temporarily lowered  amount netted from your gross pay. H.R. 8 allowed this lower rate to expire, returning it to 6.2% and thereby decreasing your overall payout. Learn more here.

But back to the good news for the middle class; here’s what H.R. 8 achieved:

  • It makes permanent the temporary rates on taxable income at or below $400,000 for individual filers and $450,000 for married individuals filing jointly. This means you can expect to pay similar income taxes as you did in 2012 if your income is at or below these limits.


  • The Earned Income Tax Creditand the Child Tax Creditremain intact. Qualifying taxpayers can claim these credits on their annual returns. There is also a $2,500 tax credit for eligible college students.
  • It extends emergency unemployment compensation benefits and federal funding for extended benefits for unemployed workers for a full year. 
  • It continues current Medicare payment rates for physicians’ services furnished through December 31, 2013.

 The legislation also addresses issues related to farming, the Alternative Minimum Tax, and which tax rates for the wealthy will increase.

There were no spending cuts included in this legislation, so it would seem that future work may focus on that area. There is also some rumbling that tax increases could come, too. CareOne will continue to monitor activity in Washington and keep you updated on any additional changes that could impact your income and your tax payments.  


The Fiscal What? Explaining the Meaning Behind the Term "Fiscal Cliff"

You can’t turn on the TV, flip through a newspaper, or surf the Web without hearing or reading some mention about the “fiscal cliff.” But when you see this term, do you know what it means? Does the media’s intense focus on the topic have you worried that the world will fall apart if we “fall off the cliff”?

The good news is the world won’t end if legislators fail to reach a deficit reduction agreement before the deadline expires at the end of 2012. However, there are some serious consequences that will begin taking place and could affect you depending on how this all plays out in Washington, DC in the weeks to come.

Defining the fiscal cliff.

 The term was first coined by Federal Reserve Chairman Ben Bernanke to describe the problem1, but many feel that the term is too alarming and prefer “fiscal obstacle course” or “fiscal slope”. “Fiscal” is another word for financial or monetary and “cliff’ represents the looming deadline that must be met before scheduled tax hikes and spending cuts automatically go into effect. However, these cuts and tax hikes won’t all go into effect immediately on January 1st, 2013, instead they’ll gradually be introduced over time. Cumulatively the overall effect on the economy will be large but it won’t all happen all at the same time.

Why the fiscal cliff exists.

The fiscal cliff “crisis” came about, in part, because of earlier legislation like the Budget Control Act of 2011 (a compromise that aimed to reduce the federal deficit (debt), resolve the debt ceiling argument, and imposed mandatory and broad cuts to major governmental programs – also known as “sequestration”) and the expiration of the Bush tax cuts. 

How the fiscal cliff could affect you.

If Democrats and Republicans don’t reach a deal, it’s hard to calculate the exact impact on the average American, but tax increases of a few thousand dollars per taxpayer are among the likely outcomes. Additionally, you may also expect to see cuts in government spending on what are commonly referred to as “entitlement programs”. These programs include Medicaid, unemployment benefits, and more. There are also mandatory cuts to military spending included in the law. It is argued that when combined, these factors could cause economic recession and increased unemployment rates2.

What’s being done about it.

Negotiations between President Obama and Speaker Boehner, and their staffs, continue, although progress has been extremely slow. Unfortunately, getting opposing groups, like Republicans and Democrats, to compromise on how best to address the nation’s deficit is growing difficult3. Republicans want to see a focus on cuts to government spending and Democrats want to see a focus on increasing taxes on the wealthiest 2% of Americans.

We will continue to monitor the situation and will update this article as developments occur. In the meantime, feel free to share your knowledge about the fiscal cliff with others who may benefit from what you’ve learned. And if you have children, a recent Washington Post article effectively explains the situation on a level that kids can understand.

  1. Washington Monthly: http://www.washingtonmonthly.com/political-animal-a/2012_12/liberals_the_fiscal_thingy_and041620.php
  2. Wall Street Journal: http://online.wsj.com/article/SB10001424127887324439804578107280483982220.html
  3. CBS News: http://www.cbsnews.com/8301-34222_162-57558034-10391739/little-change-in-fiscal-cliff-talks-or-talking-points/ 

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