The Fiscal Cliff – Hold your nose and jump!

What exactly does the fiscal cliff mean and how will it affect you?

January 1st, 2013 may be more than just another New Year’s Day.  In 2013 it might be a very frightening day indeed.  Known as the ‘Fiscal Cliff’ it is the day that our current tax code changes drastically due to the end of some tax breaks and the start of other new taxes.

There are a few basic things that comprise the Fiscal Cliff.

1. The end of the Bush tax cuts.  In 2001 and 2003 when the Bush tax cuts went into effect the law was passed along party lines and without the 60% majority found themselves with a 10 year limitation.  We have arrived at that 10 year finish line and the tax cuts will end on December 31st, 2012.  This of course means that when you wake up on January first your income will be taxed at a higher rate regardless of what your income is.  It does not just affect the high income earners.  Income taxes will go up about 5%, capital gains taxes will go up about 5% and dividend taxes will go up as well.  In essence, every way most Americans earn money will now be taxed at a higher rate.  

2. The payroll tax reduction of 2% will end.  Companies have been given a 2% cut in payroll taxes in order to afford them the opportunity to retain employees.  That opportunity ends and workers will be laid off.  The only questions will become – how many?  

3. New Obamacare taxes go into effect.  Remember how Obama said nobody would pay higher taxes due to Obamacare?  He lied!  Investment income will be taxed at a higher rate (about 4%) to help fund the behemoth of a federal program.  There will also be new taxes on companies that make medical devices – so all those checkups you get that require a special medical device (virtually all checkups) will go up in price on January 1st.

4. Estate taxes will go up by 20 percentage points from 35 to 55 percent, and the estates will now be taxed when they reach $1 million, instead of $5 million.  So much for Daddy leaving you a fortune…

And finally, sequestration.  No Simple Malarkey this does not mean something to do with horses!  Sequestration has to do with automatic federal budget cuts to avoid piling onto the national debt.  The automatic cuts affect all manner of federal programs, inlcudng many entitlement programs.

This financial ‘perfect storm’ makes Hurricane Sandy look like  a fart in the bathtub!  Folks, this is a BFD as Joe Biden would say!  By the way, where is Joe Biden since the election?  That being said it is likely that the great majority of working Americans will see their incomes reduced by 10 to 25 percent due to new taxes.  That is catastrophic and shame on every legislator and elected federal official for allowing this to take place – Republican and Democrat alike.

Without resolution to the fiscal cliff, which many expect will largely be kicked down the street by extending most tax cuts, we are in dire straights.

My prediction is a luke warm attempt to resolve this in Washington and the result will be layoffs and a stock market tumble.  I predict….here it comes….unemployment to rise above 10% by February 1st.  I also expect a 10 to 15 percent drop in the markets by the same date.  What are your predictions?  

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