Fiscal Cliff 101

Much weight has been given to the Fiscal Cliff on several news outlets. Yet, how many people actually know what it is?

In hopes of getting a well executed answer, I've asked my parents and peers if they had the slightest idea about what the Fiscal Cliff was, but their responses were, "I'm not exactly sure. I know it has to deal with taxes and the deficit though."

That wasn't much help.

Thankfully, one of my professors pointed me in the direction of Forbes' "Fiscal Cliff for Dummies."

For those who don't understand it or even for those who want to refresh their knowledge on it, here are the basics to the Fiscal Cliff:

1. A mixture of the Bush Era Tax Cuts expiring on  Dec 31, 2012, plus a reduction of government spending = Fiscal Cliff.

2. Bush Era Tax Cuts lowered the tax rates for individuals, capital gains and qualified dividends. However, if congress cannot agree on a solution, tax rates will increase for EVERYONE.

3. Obama Era Tax Cuts (primarily the increased child tax cut, earned income credits and expanded education credits) are set to expire Jan 1, 2013. Basically, taxes will increase for the middle class if a solution is not reached.

4. Social Security was cut from 6.2% to 4.2% on payroll taxes, but are set to expire at the end of 2012.

5. Individuals making $250,000+/yr will pay an additional 0.9% increase on their wages plus a 3.8% increase on their unearned income.

6. Estate taxes tax empetion and tax rate are currently at $5,120,000 and 35% but will change to $1,000,000 and 55% come January.

7. In 2010 & 2011, the AMT exemption was raised from $45,000 to $74,450 for Married Filing Jointly. In 2013, it will go back to $45,000 pulling a large amount of taxpayers into AMT.

8. Discretionary spending will also be cut according to TheStreet.Com (<--Click to watch explanatory video). 

So, what does this mean for you?

If we do hit the Fiscal Cliff...

The lower 20% of income earners, the child tax and earned income credit will be raised by $412 with the removal of the 10% bracket.

The middle 60% will experience the Bush Era Tax Cut's extinction and a payroll tax increase will raise taxes by $2,125.

The Top 20% will experience a tax increase of $14,173 due to the dividend rate increase from 15% to 39.6%.

The top 1% will experience a tax hike of $120,537.

According to Fiscal Cliff for Dummies Part 2, people will have less money to spend if tax rates go up which will hurt the economy.

Employers will then worry about the economy's status and assume their products' demand will decrease resulting in a halt in hiring or higher wages. Both add to the predicted unemployment rate if congress cannot agree on a solution.

"Fiscal Cliff for Dummies" on The Daily Beast says Republicans prefer keeping the Bush Era Tax Cuts as they are while President Obama suggests that individuals and couples making over $250,000/yr should pay higher taxes. Both agree on cutting spending in order to reduce the deficit.

Examiner.com says anyone who makes more than $250,000/yr can pay more in taxes so that those making $50,000/yr don't have to see a tax increase.

Obama already extended the Bush Era Tax Cuts, that were supposed to expire in 2010, to this year.

And with the help of The Budget Control Act, the President was able to raise the debt ceiling by $1 trillion in August 2011.

Will the POTUS and congress repeat similar actions? Or will they find common ground between both of their proposals?

*Political cartoon photo credit

*Fiscal Cliff Ahead sign- Google: "Fiscal Cliff."