Fiscal cliff: How will you be affected?
What's the fiscal cliff?
If a deal isn't reached by Jan. 1, tax increases and government spending cuts to the tune of $800 billion automatically take effect. Some economists say such a withdrawal of fiscal stimulus has the potential to throw the world's biggest economy back into recession.
If the tax increases and cuts kick in, it's expected to reduce the budget deficit, but will lead to lower growth. The alternative is to reject the planned cuts and allow the deficit to continue to grow - allowing for stronger economic growth, but leaving the debt issue unchallenged.
Here's a look at what it means if Congress fails to reach an agreement by the Dec. 31 deadline:
Higher tax brackets: The lowest 10% bracket would disappear, and the highest would rise from 35% to 39.6%.
Higher payroll taxes: The "payroll tax holiday" of the past two years will expire, raising workers' Social Security contributions to 6.2% of their paychecks from the current 4.2%.
Higher rates on capital gains (from a current 15% maximum to a 20% maximum) and dividends (from a current 15% to as high as 43.4%).
Significantly lower child and dependent care tax credits.
The return of the so-called marriage penalty.
The end of temporary fixes that keep nearly 30 million families from having to pay the dreaded alternative minimum tax.
Dramatically lower gift and estate tax exemptions (the limits will plunge from $5.12 million to $1 million) and higher tax rates on transfers in excess of those limits (from a maximum 35% to a maximum 55%).
The Tax Policy Center estimates that the end of virtually every tax cut enacted since 2001 would boost taxes an average $3,500 per household. Middle-income families would see an average annual tax increase of almost $2,000, the center said.
The $100 billion in automatic spending cuts -- which include $30 billion in cuts to the defense budget -- are a result of Congress' previous failure to come up with a workable compromise to cut the deficit.
Here are some links that explain the issue in more depth: