Is the Fiscal Cliff Going to Cause Chaos at Tax Time?

This economic conundrum called the “fiscal cliff” resulted from 30% mandatory federal budget spending cuts and the expiration of tax cuts introduced during the Bush era, which President Obama extended in 2010.

The threat of the fiscal cliff loomed large at the end of 2012 and at that time people were talking about how it’s going to affect their finances come tax time next year. Without a doubt, it’s going to cause some sort of chaos. While it’s going to affect everyone regardless of income level, the hardest hit would be working-class families that compose America’s middle class.

If existing laws remain unchanged in January 1 or 2 of 2013, taxes will automatically increase while the US budget deficit will decrease.

What Economic Pundits Say

The Congressional Budget Office predicts a recession early next year. The nonpartisan group also sees a 7.9 to 9.1% increase in unemployment rate both on state and local level jobs, and 0.5 percent decrease in gross domestic product. Everyone will get a share of the burden, though African-Americans workers might be hit the hardest.

Some economists say that the “fiscal cliff” is not a cliff per se but a slope. Fiscal hill or fiscal slope, they argue, is a more appropriate term since the effects will be felt gradually and can be reversed.

How High Will Taxes Go

It’s not just the African-American workforce who will be hit hard. Other taxpayers in high-cost urban areas will also be affected.

Here’s one scenario: Expect taxes to go high, even higher than what average families are willing to pay. Income and payroll taxes will go up, with tax bills increasing up to an average of $3,500 per family. Without the 2% tax cut enacted in 2010, an average worker will now earn about $20 less a week or $1,050 less each year.

For inherited estate valued above $1 million, tax will increase to 55 percent, a level that hasn’t been seen for several years. It’s a far cry from the estate tax paid in 2012 which was set at 35 percent and applies only to inheritances exceeding $5 million. Tax on dividends will also increase more than a twofold from 15 percent to 39.6 percent. Over 30 million will be affected unless the tax cut is extended.

What Needs to be Done

The Obama administration and Congress are yet trying to reach an agreement on how to address the year-end end of tax cuts. Also, both Democrats and Republicans will have to find a better way to reduce the budget deficit. A recent Gallup poll revealed that Americans are willing to see their lawmakers reach a compromise on the fiscal cliff agreement just to avoid the tax hikes. Enrolling in a tax LLM program will certainly shed some light on all of this. 

Event Calendar