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‘Fiscal cliff’ basics: Understanding the “fiscal cliff”

by root shed

The “fiscal cliff of 2012” is the combination of American tax payers’ tax cuts and the United States government’s spending cuts.

Obviously, if the government is going to pass a bill which continually involves taking in less money via Americans’ taxes, there needs to be a balanced measure in which the government eventually spends less. Without the governmental balance of less monetary intake and less monetary spending, the effect of continuing the current financial plan of 2012 will have an extremely negative effect on the American economy which is already in a poor state.

An agreement between the United States Congress and President Barack Obama must be reached by Dec. 31, 2012 to avoid “going over the fiscal cliff” which would result in American citizens having less money in their possession than they have now. There are other issues within the complex debate that will be impactful on society as well.

In the most basic of categories, the “fiscal cliff” involves tax rates, unemployment benefits, tax deductions, Medicare payments to doctors, and sequesters.

The areas of “fiscal cliff” concern that have the most immediate financial impact on society involves the extension of the tax cuts that are currently in place as well as the length of time unemployed people who are receiving unemployment checks may receive financial assistance from the government. The Tax Policy Center – as well as statements from President Obama – has stated that an average, middle class family of four will have an approximately $2,000 additional taken in taxes in 2013 if the tax cuts are not extended. More specifically, the current tax rates for Americans are 10%, 15%, 25%, 28%, 33%, and 35%. The rates are set to return to 15%, 28%, 31%, 36%, and 39.6%.

Additionally, Social Security recipients will be affected as well. They will have to pay more taxes as the tax rate will increase about one-third from the current 4.2 percent to 6.2 percent.

Also, the current 99 weeks of unemployment checks now being issued to unemployed Americans who qualify will be drastically cut to a less amount of time. How much time depends on various factors for different people.

Beyond the tax cuts and unemployment assistance to citizens, there is the disagreement on what will be cut from the budget to pay for the continued tax cuts and the extended unemployment checks. This portion of the current debate in Washington, D.C. is known as the sequestration (sequester) which is basically pinpointing what will be cut – or not cut – from the nation’s budget. Of the many debates on this issue, the most heated debate, currently, is whether the government’s military (defense) spending should be cut. Republicans maintain that America is still at war and now is the wrong time to be cutting military spending. President Obama disagrees and wants to cut military spending.

There are also the issues of capital gains’ taxation going back up one-third to 20 percent from 15 percent, child tax credit being cut in half from the current $1,000 back down to $500, and the estate tax increasing more than one-third, as well as other various tax deductions that are financially advantageous to Americans when they pay their income taxes annually.

Finally, the other issue involves the nation’s physicians and how much they get paid for Medicare patients. Should an agreement not be reached by year’s end, doctors who take Medicare patients will see a 27% cut in the finances they receive for servicing these patients. This ongoing frustration has caused many doctors to quit caring for Medicare patients and others to threaten to not take these patients. While both sides of the political aisle – Republicans and Democrats – agree that doctors should not be financially punished in the “fiscal cliff” process, there is strong disagreement as to how this is going to be paid for in the future.

The primary source of this article is Investopedia.

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