Confused by all this talk of a "fiscal cliff" and what it means to you? As lawmakers in Washington try to beat tonight's deadline, here are some answers.
What is the "fiscal cliff?" -- The "fiscal cliff" refers to the expiration of a series of economic measures (tax relief, reauthorization of unemployment insurance and the Job Creation Act of 2010) that are set to end this year.
What happens if no deal is reached? -- If a deal is not reached between the White House and lawmakers, spending cuts will begin to take effect and tax breaks will expire, which both sides argue will push the U.S. economy off the "cliff" and possibly into another recession.
How likely is an agreement? -- Several lawmakers have expressed confidence over the past few days that some kind of deal -- most likely a scaled back deal -- will get done, but talks have started and stopped several times over the past several weeks. Senate Majority Leader Harry Reid and other Democrats believe asking "the richest of the rich" to pay more must be the biggest part of the equation.
House Speaker John Boehner, a Republican, maintains that the GOP is willing to consider some form of higher taxes as part of the solution, but only "under the right conditions," which haven't been laid out clearly.
Republicans have also insisted on cuts to Medicare, Medicaid and food stamps, known as entitlement programs in Washington-speak, but it's not yet known how many of these items could make it into a final deal.
How are the markets reacting? -- U.S. investors were still anxiously awaiting good news out of Washington on Dec. 31 after watching markets edge down for five days in a row. Several European markets were closed for the holiday, but Asian markets were strong on New Year's Eve.
How did we get here? -- One could trace its origins back to the 1960s and the creation of the Alternative Minimum Tax. Then in 2001, President George W. Bush signed the first of two tax cuts scheduled to expire under the next president. Then, President Barack Obama twice extended those tax cuts and added his own, including a huge break on payroll taxes. In 2011, Republicans insisted on trillions in spending cuts in exchange for raising the debt ceiling under the Budget Control Act.
Now all of those things -- the Alternative Minimum Tax, the undoing of Bush/Obama tax cuts and the Budget Control Act -- are about to hit. It's what some call a "perfect storm" of economic disaster.
How much in cuts are we talking about? -- The automatic spending cuts could total $800 billion next year.
What's in the cuts? -- An estimated $55 billion will be cut in 2013 from projected levels of discretionary defense spending. That translates into at least a 10 percent cut to every program, project and activity that's not explicitly exempt.
Bush Tax Cuts -- The Bush tax cuts are also set to expire on Dec. 31. As a result, income taxes will go up in every income bracket, credits such as the child tax credit and earned income credit will be no more, estate tax parameters will revert to pre-2001 levels and the capital gains rate will rise.
Payroll Tax Holiday -- The payroll tax holiday expires. The Social Security tax rate reverts to 6.2 percent, up from 4.2 percent, on the first $110,100 in wages. Effectively, someone making $50,000 will pay another $1,000 in payroll taxes next year.
Unemployment Benefits Extension -- The federal unemployment benefits extension expires. That means workers who lose their jobs after July 1, 2012, will only receive up to 26 weeks in state unemployment benefits, down from as many as 99 weeks that had been available until recently.
By one estimate, more than 2 million claimants will lose their benefits by January.
Medicare Physician Reimbursement -- Medicare payment rates for physician services would drop by 27 percent.
How much would all of this cost me? -- If your household makes a typical salary -- say, $50,000 -- you should expect to pay $2,000 more in taxes next year. If your household makes an atypical salary -- say, $500,000 -- you should expect to take a $50,000 hit. The richer you are, the bigger the hit you face as a share of income.
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