What is the Fiscal Cliff?

In simple terms:

1. $110 Billion in spending cuts.

2. About $400 Billion in tax increases.


Lets break this down a bit more.

The $110 Billion in cuts is the easy part to explain.   $55 Billion in Defense and $55 in non-defense.

Current US budget is about $3.8 Trillion with only  $2.6 Trillion only in revenue. So that means $1.2 Trillion is borrowed.

What does that tell you $100 Billion in cuts is less the 5% of the budget.

Now lets look and the tax increases  If nothing is done buy Jan 1 2013. Taxes for everyone are going up. Not only the people making over $250,000.

I am not going to give you all the numbers on that tax bracket you are in and what you will owe next years. I will just highlight main points.

Bush tax cuts expire.

Capital gains rate increases 5%.

Qualified Dividend Rate 

PEP/ Pease limitations.

Child tax credit  decreases to $500 per child from $1,000.

American Opportunity Tax credit  expires.

Earned Income tax credit expires.

Marriage penalty relief: Expires

Estate Tax: Goes up to 55% from 35%

Alternative Minimum Tax

Payroll tax holiday Expires.

Unemployment benefit extension expires. No more 99 weeks of unemployment back to 26 week.

Tax exemptions for small business expire.

Health care tax come into effect for high income earners.


Not all those above taxes increase you will see. But on the average salary you will pay about 5% more in taxes next year to the Federal Government. This does not include any high taxes on the state or local level.

This is where the $400 Billion come in. That is $400 billion less in the economy to spend. Some are predicting a recession next year if this is not fixed.

Will it be fixed I don’t think so I think the Politicians will kick the can down the road a few month few year. If I have learned anything for history it that it repeats itself.


Feel free to share this post. 


Permanent link to this article: http://passiveinvestor.com/what-is-the-fiscal-cliff/

Leave a Reply

Switch to our mobile site