How the Fiscal Cliff Will Affect You

Washington hasn't sent you a parachute, yet it's pushing the nation off the fiscal cliff anyway. So it's time for ordinary people to figure out how the shenanigans in Washington will affect them.

Democrats and Republicans seem unable to make any kind of deal to prevent a huge set of tax hike and spending cuts from going into effect at the start of 2013. The media tends to refer to the cliff as if it's one huge measure that will instantly cause a recession if Congress does nothing to stop it. But the cliff really involves several different tax and spending policies that will affect taxpayers in many different ways, not all of them right off the bat.

So here's how the major aspects of the fiscal cliff are likely to affect ordinary people, assuming they go into effect beginning January 1, 2013:

An increase in payroll taxes. This is the simplest tax change to compute. The payroll tax withholding, which is used to fund Social Security, is due to rise from a reduced level of 4.2 percent--which was set temporarily in 2009--to the normal level of 6.2 percent. The payroll tax will apply only to the first $113,700 of earnings in 2013. So you can simply calculate what two percent of your income will be in 2013, to estimate the additional amount you'll pay. For the typical earner, a two-point increase will amount to about $700 in added tax payments per year.

[ENJOY: Political Cartoons on the Fiscal Cliff]

Income tax hikes. All rates are scheduled to revert to the higher levels of the 1990s, which for most workers would mean an increase of 3 to 5 percentage points in the tax rate they pay. But this won't necessarily affect anybody right away, because the government doesn't automatically increase the amount of tax payments withheld from your paycheck. In fact, higher rates would only hit taxpayers in 2014, when they file their 2013 tax returns. So if rates rise temporarily and Congress then lowers them retroactively to 2012 levels, nothing would change for most people.

A higher estate tax. In general, it would rise from a rate of 35 percent with the first $5 million exempt, to 55 percent with only the first $1 million exempt (and no scheduled increase in the exemption over time, to account for inflation). The Tax Policy Center estimates that the lower exemption limit would make 10 times as many estates subject to tax in 2013 as in 2012.

No "patch" for the alternative minimum tax. This complex part of the tax code basically requires higher earners to pay more than they would under normal rates and deductions. Since the cutoff point isn't indexed for inflation, Congress typically raises it each year, to prevent too many people from getting snared by the AMT. But it hasn't done that for tax years 2012 or 2013 yet. And if it doesn't, taxes will rise for tens of millions of taxpayers with incomes starting at about $34,000 for individuals and $45,000 for couples. Since this affects 2012 taxes, it would begin to hit taxpayers early in 2013, as they begin to prepare their 2012 tax returns.

A higher capital gains tax rate. The tax rate on capital gains is scheduled to rise from 15 percent to 20 percent. The 2010 healthcare reform law will raise capital gains taxes by another 3.8 percentage points for people with incomes over $250,000. As with income taxes, the higher rates wouldn't hit taxpayers until they prepare their 2013 taxes, in early 2014. But some people, anticipating the higher rates, have already been selling investments and locking in gains this year, to be sure they're taxed at the 2012 rate.

[RELATED: 5 Things to Do If the Fiscal Cliff Happens]

A higher tax rate on dividends. Most dividends, including those paid on stocks, are now taxed at a maximum rate of 15 percent. In 2013, they're supposed to be taxed the same as ordinary income, which would be as high as 39.6 percent. As with capital gains, some investors have been selling dividend-yielding assets to lock in the lower 2012 tax rates.

Fewer tax credits for low-income families. A trio of tax breaks meant to help lower earners, including the earned income tax credit, would be worth less in 2013, raising taxes on a family in the lowest income bracket by about $200 per year. As with income taxes, this change wouldn't really hit until 2014, when people prepare their 2013 returns and claim the credits.

The end of miscellaneous tax credits. This grab bag of tax breaks, known in Washington as "extenders," includes things that affect businesses and some individuals, including the adoption credit, deductibility of state and local taxes, and the bonus depreciation provision for some business investments. The expiration of these measures would hit higher earners the hardest, including small-business owners. They wouldn't affect tax payments until people prepare their 2013 returns, but some businesses may make accounting or strategic changes in anticipation of the changes.

The end of extended unemployment insurance. It's not a tax, but the end of the federal extension of unemployment insurance could be one of most painful effects of the fiscal cliff. Up to three million jobless people who have exhausted the benefits offered by states--typically 26 weeks' worth--would also lose federal jobless aid if this program isn't renewed. That would hammer people who are already hurting, possibly leading to more foreclosures and lower consumer spending.

[NEWMAN: The Right Way to Resolve the Fiscal Cliff]

Layoffs. Because the cliff also entails about $110 billion in government spending cuts per year, it would force most government agencies to pare their budgets, plus hit hundreds of private-sector companies that contract with the government. About half of those spending cuts must come from defense, which would directly affect companies like Lockheed Martin and Boeing, probably causing layoffs. These cuts would begin immediately in 2013, which means it could be messy trying to reinstate spending retroactively, if that's what Congress decided to do. One way or another, there will be some wreckage at the bottom of the fiscal cliff.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

More From US News & World Report


Get stories like this on the Yahoo app and discover more every day.
Download it now.
  • Asia stocks hold gains before Yellen speech, dollar firm
    Asia stocks hold gains before Yellen speech, dollar firm Reuters - 4 minutes 36 seconds ago

    Asian stocks edged higher on Thursday but clung to recent well-worn trading ranges while the dollar held firm against regional currencies ahead of a speech by Federal Reserve Chair Janet Yellen at a global central bankers' meeting. MSCI's broadest … More »

  • Huge losses at Australian retail giant Woolworths
    Huge losses at Australian retail giant Woolworths AFP News - 34 minutes ago

    Australian supermarket giant Woolworths on Thursday reported a large annual net loss of Aus$1.23 billion (US$940 million), its first since listing more than two decades ago, following a failed push into hardware and a slump in food sales. … More »

  • Maybank Posts Third Straight Profit Drop on Loan Impairments (1) Bloomberg - 41 minutes ago

    Net income fell to 1.16 billion ringgit ($288 million) in the three months through June from 1.58 billion ringgit a year earlier, the Kuala Lumpur-based company said in a stock exchange filing on Thursday. Maybank reiterated its “vigilance” over … More »

  • SE Asia Stocks-Lacklustre ahead of Yellen speech Reuters - 49 minutes ago

    By Krishna V Kurup Aug 25 (Reuters) - Southeast Asian stock markets were lacklustre on Thursday after an overnight drop on Wall Street, while the dollar rose ahead of a speech by Federal Reserve Chair ... … More »

  • Clean air but murky policy as Yellen speech awaited
    Clean air but murky policy as Yellen speech awaited AFP News - 1 hour 3 minutes ago

    If US Federal Reserve chief Janet Yellen chooses to use her closely watched address on Friday to clear the air, she will have plenty of clearing to do. Yellen, who will address a ballyhooed annual gathering of central bankers in the crisp climate … More »

  • Galaxy’s Profit Beats Estimates as New Resorts Woo Tourists (1) Bloomberg - 1 hour 6 minutes ago

    Adjusted earnings before interest, taxes, depreciation and amortization, or adjusted Ebitda, was HK$2.3 billion ($297 million), compared with the HK$2.25 billion median estimate of five analysts surveyed by Bloomberg. Galaxy, Macau’s largest casino … More »

  • Indonesian navy finds fuel tanker taken by own crew AFP - 1 hour 10 minutes ago

    Indonesia's navy said Thursday it had found a tanker carrying almost $400,000 worth of diesel that was taken by its own crew last week due to a commercial dispute. The MT Vier Harmoni was initially feared ... … More »

  • Oil prices extend losses as dealers eye output talks AFP - 1 hour 21 minutes ago

    Oil prices edged down again in Asian trade Thursday, a day after suffering hefty losses in response to data showing a surprise jump in US stockpiles, while hopes for a deal to limit output were dealt a ... … More »

  • Oil prices dip as focus returns to global supply overhang Reuters - 1 hour 37 minutes ago

    Crude prices dipped on Thursday as brimming U.S. and Asian fuel inventories returned investor attention to a large global supply overhang, cutting short a price-rally and restricting Brent crude futures to below the $50 a barrel mark. International … More »

  • Korea Encourages Stricter Home Loan Screening Amid Record Debt Bloomberg - 1 hour 40 minutes ago

    The pace of household debt has accelerated in recent years as the Bank of Korea lowered rates to unprecedented levels and the government eased property regulations to support the economy. The booming property market has played a key role in … More »

  • Dollar Rally Wanes as Markets Calm Before Yellen; Iron Ore Sinks Bloomberg - 1 hour 41 minutes ago

    The Bloomberg Dollar Spot Index snapped a four-day winning streak that was fueled by hawkish comments from Fed officials. Fluctuations in the MSCI Asia Pacific Index over the past two weeks have been the most muted since 2012 and gauges of expected … More »

  • Aluminium giant Rusal reports 70% net profit plunge AFP - 1 hour 48 minutes ago

    Russian aluminium giant Rusal said Thursday net profit fell 70 percent in the first half of 2016, as weaknesses in global commodities markets keeps prices depressed. The cost of aluminium sank to six-year ... … More »

  • Weekend guide (26-28 Aug): Singapore Night Festival, Tanjong Goodman Weekend Market and Singapore Rhapsodies The Concert 2016
    Weekend guide (26-28 Aug): Singapore Night Festival, Tanjong Goodman Weekend Market and Singapore Rhapsodies The Concert 2016 Yahoo Newsroom - 1 hour 56 minutes ago

    Do everything from planet-gazing at the Science Centre, attending the Singapore Night Festival, shopping at the Tanjong Goodman Weekend Market to catching a concert by Mando pop-rock duo Power Station and more fun events this weekend. … More »

  • Thai Political Risks Wash Over Investors Inured to Coups (1) Bloomberg - 2 hours 2 minutes ago

    “The Thai economy has thus far proven to be resilient and able to bounce back from political shocks,” said Edward Ng, a Singapore-based fixed-income portfolio manager at Nikko Asset Management, which was overseeing more than $170 billion as of … More »

  • Malaysia's closing tin prices for Aug 25 Reuters - 2 hours 10 minutes ago

    KUALA LUMPUR, Aug 25 (Reuters) - Following is a table of Kuala Lumpur tin market prices provided by a Malaysian trader. (Prices in $/tonne, and volumes in tonnes unless stated) Date KL Premium/ Spot Bid ... … More »

  • Why It Makes Sense To Own A Credit Card From Young - 2 hours 11 minutes ago

    Being financially responsible starts from a young age. The post Why It Makes Sense To Own A Credit Card From Young appeared first on … More »

  • Dollar edges lower as market awaits Yellen speech AFP - 2 hours 12 minutes ago

    The dollar was barely moved Thursday ahead of a speech by Federal Reserve boss Janet Yellen that could shed light on whether a 2016 rate hike is still on the cards. With the economic calendar relatively ... … More »

  • Gabon's Bongo finds new pep on the campaign trail
    Gabon's Bongo finds new pep on the campaign trail AFP News - 2 hours 40 minutes ago

    Ali Bongo of Gabon, who is running for a second seven-year term in Saturday's presidential election, has spent more than half his 57 years cruising the corridors of power. Known variously by his initials ABO, Ali B and less flatteringly as … More »

  • Asia energy firms extend losses as oil falls
    Asia energy firms extend losses as oil falls AFP News - 2 hours 44 minutes ago

    Asian energy firms fell further on Thursday as oil extended losses, while currency traders moved cautiously the day before a key speech by Federal Reserve boss Janet Yellen. World markets have struggled to gain traction this week with few catalysts … More »

  • Indonesia finds ship that was taken by disgruntled crew Associated Press - 2 hours 54 minutes ago

    Indonesia's navy said Thursday it has located a fuel tanker that was missing for a week after being taken from port by its disgruntled crew. The navy said in a statement that the MT Vier Harmoni with 10 ... … More »

  • China's CNOOC reports $1.16 bn net loss
    China's CNOOC reports $1.16 bn net loss AFP News - 2 hours 59 minutes ago

    China's main offshore oil and gas producer CNOOC saw its shares on the Hong Kong stock exchange fall on Thursday, after it reported a $1.16 billion net loss for the first half of 2016. It was the company's first half-year loss since it started … More »

  • Marketing solutions company CtrlShift names new CEO, CFO and Malaysia Country Head
    Marketing solutions company CtrlShift names new CEO, CFO and Malaysia Country Head e27 - 3 hours ago

    Team to take on Southeast Asia’s digital advertising industry, expected to hit US$9.9 billion by 2025     CtrlShift, a data-driven audience-focussed marketing solutions company, has announced three new appointments to its management team. Deepika … More »

  • Asia stocks mark time before Yellen speech; dollar firm
    Asia stocks mark time before Yellen speech; dollar firm Reuters - 3 hours ago

    Asian stocks edged higher on Thursday but clung to recent well-worn trading ranges while the greenback held firm against regional currencies ahead of a speech by Federal Reserve Chair Janet Yellen at a global central bankers' meeting. MSCI's … More »

  • PBOC Money-Market Tactic Has Traders Trying to Decode Signal (2) Bloomberg - 3 hours ago

    The People’s Bank of China sold 50 billion yuan ($7.5 billion) of 14-day reverse-repurchase agreements on Wednesday, its first offering of anything with a tenor other than seven days since February. Officials are signaling they’re ready to curb … More »

  • Asian shares waver in thin trading after Wall Street decline
    Asian shares waver in thin trading after Wall Street decline Associated Press - 3 hours ago

    Shares wavered in thin but volatile trading in Asia on Thursday, following a bleak day on Wall Street led by declines in health-care stocks as outrage mounts over steep price hikes for Mylan's EpiPens. ... … More »

Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
to view quotes in your portfolios.


  • Most Actives
    Most Actives
    NamePriceChange% Chg
  • % Gainers
    % Gainers
    NamePriceChange% Chg
  • % Losers
    % Losers
    NamePriceChange% Chg

Market Data

  • Currencies
    NamePriceChange% Chg
  • Commodities
    NamePriceChange% Chg
  • Bonds
    TreasuryYield (%)Yield Change