Tags: Fiscal | cliff | tightrope | taxes

How Regular Americans Are Walking a Tightrope Over the Fiscal Cliff

By John Morgan   |  

The fiscal cliff, the package of tax hikes and spending cuts set to take effect at the end of 2012 unless Congress replaces gridlock with compromise, looms larger each day.

Many political observers expect Congress to ink a last-second deal to avoid disaster. But there’s no easy path around the tough decisions that need to be made, and many Americans will feel some pain.

A U.S. News & World Report predicts what ordinary Americans should expect if we do fall off the cliff.

Editor's Note:
The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

At the top of the list is that there could be a modest tax hike. Congress will try to avoid the expiration of the Bush-era tax hikes because that would mean a punishingly large tax increase. But U.S. News says the smaller 2009 payroll tax cut might be allowed to expire; this tax cut has saved the typical worker $85 per month, or $1,000 per year.

Next up, would be reduced unemployment benefits — from the current stimulus program extension of 99 weeks, back to the typical 26 weeks.

Many business leaders lack confidence in the economy, according to a recent Business Roundtable survey, U.S. News reports. That may mean even weaker hiring going into the end of 2012, which portends a weak holiday period for retailers and fewer raises for workers.

In addition, U.S. News also predicts more federal job and benefit cuts and increased volatility in the stock market as the fiscal cliff approaches.

Meanwhile, CBS MoneyWatch offers four tax strategies for Americans to employ in advance of the fiscal cliff outcome:

First, it might be smart to accelerate ordinary income in 2012, which would mean direct savings if higher taxes are levied.

Next, it might not be wise to delay taking capital gains if they can be taken now. Even if long-term capital gains do not rise, the new 3.8 percent Medicare surcharge tax will apply to realized capital gains in 2013.

Third, CBS MoneyWatch recommends deferring tax-deductible expenses such as charitable donations to 2013, on the theory that if taxes in general do increase, the deductions will mean more next year.

Finally, Americans might want to confer with a tax adviser on strategies to minimize the effects of the new Medicare surcharge tax. It will apply to investment income in many cases, but not to tax-exempt interest from municipal bonds, and not some rental income or distributions from Roth IRAs.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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