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Reality Check: How could the fiscal cliff affect you?

Published On: Nov 15 2012 06:34:33 PM CST
Updated On: Nov 15 2012 10:09:49 PM CST

Congress continues to grapple with how to handle the looming "fiscal cliff" coming at the end of the year, so far sparking a standoff between the two parties.

But what is this cliff, and how could it affect you?

The "cliff" itself is the result of a bill that raised the debt ceiling last year but left it up to a super-committee to work out cuts. That committee couldn't agree, and now if nothing is done before the end of the year, a spending cuts and tax increases could take effect that would amount to $7 trillion over the next 10 years.

So what does that mean to you? The cliff could cause a domino effect on taxes for 90 percent of the country. The nonpartisan Tax Policy Institute estimates that middle-income taxpayers would see taxes go up about $2,000, and the average increase across all tax brackets is estimated at $3,500.

Why? Multiple tax cuts would expire, including a payroll tax cut affecting 120 million workers and the Bush tax cuts affecting all income taxpayers. A tax credit for college tuition would be eliminated, a $1,000 tax credit per child would be cut in half, and 10 times more people would pay the estate tax than this year.

Then there's the spending cuts, the result of which nobody is certain. The cliff would trigger $1.2 trillion in cuts, half to defense spending and the other half to domestic spending. That's anywhere from an 8-10 percent cut across the board. Also, for unemployed people, the amount of federal benefits they would be eligible for could be drastically cut from 99 weeks of unemployment to just 26 weeks.

In a report this month, the Congressional Budget Office warned it could send the economy back into a recession and send unemployment back over 9 percent.

Then there are the options for how to fix it. The president is pushing tax increases on the country's top wage earners, promising to veto a bill that doesn't include them. Republicans said that's not an option and are pushing to close tax loopholes and eliminate deductions to find revenue.

Congress and the president need to come to an agreement by Dec. 31 to avoid all of the changes, and that's not to say what type of stock market and economic impact any impasse could cause between now and then. Already, stocks have taken a hit on the fiscal cliff discussion. The Dow Jones, S&P and Nasdaq composites have all fallen sharply in the past two days.

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