As the midnight deadline looms for Congress to work out an agreement on how to avoid the fiscal cliff, things are not looking rosy. Negotiations ended on Sunday with members of Congress still split over key parts of the bill, such as where to start raising taxes. "I think we’re going over the cliff," Sen. Lindsay Graham tweeted. If he's right, it's high time to start thinking about what happens after we go over. So here's how the combination of spending cuts and tax hikes will unfold over the next few months, beginning at 12:01 a.m. Tuesday.
Jan. 1, 2013
- Payroll taxes rise. Each worker will pay 2 percent more to fund Social Security, returning to the 6.2 percent rate after two years of paying 4.2 percent. "Effectively that means someone making $50,000 might get about $83 less a month in their paychecks," CNN explains.
- The Bush tax cuts expire. These encompass taxes on individual income, estates, capital gains, and dividends — as well as tax credits like the child tax credit, according to the Washington Post.
- The Alternative Minimum Tax hits 28 million new people. Originally designed to make high earners pay a "minimum tax," it wasn't indexed for inflation. Therefore, every year Congress has to pass an inflation adjustment. Without passing one, the exemption will fall to $33,750 for singles and $45,000 for couples. If you make more than that, you'll pay more. (The AMT affects 2012 taxes, so this will delay as many as 100 million tax returns, according to the IRS.)
- Stimulus measures expire. Including the "Earned Income Tax Credit, which provides aid to low-income workers, as well as the child credit, and the American Opportunity tax credit, which helps families pay for college tuition," according to the Post.
- Medicare payments to doctors drop by 27 percent. Congress must pass the so-called doc fix, which "reverses temporarily cuts that Congress passed, and former President Bill Clinton signed, as a deficit reduction measure in 1997," per the Post.
- Unemployment benefits expire. Workers who lost their jobs after July 1, 2012, will only receive up to 26 weeks in state unemployment benefits, down from as many as 73 weeks in state and federal benefits, CNN explains.
Jan. 2, 2013
- The $1.2 trillion package of spending cuts, called sequestration, kicks in. They're scheduled to go into effect over the course of nine years, but they'll be felt immediately, National Journal explains. "For 2013, that means $109 billion in cuts, half from the national defense budget and half from nondefense spending," including everything from Pell Grants to Head Start to federal disaster relief to the salaries of federal workers.
Jan. 31, 2013
- This is the earliest day unpaid furloughs could start for federal workers, a likely effect of the spending cuts. "Agencies must give at least 30 days' notice to employees for a furlough that would last less than 22 work days; 60 days' notice is required for longer furloughs," CNN points out, and so far, all federal employees have been told to report to work on Jan. 2, when the cuts would start. But the Wall Street Journal notes that "the Pentagon plans to notify 800,000 civilian employees that they could be forced to take several weeks of unpaid leave in 2013 if a deal isn't struck, and other agencies are likely to follow suit."
- The debt ceiling must be reckoned with. The U.S. hits it on Dec. 31, but the Treasury Department says it will use "extraordinary measures" to keep paying creditors. Those are expected to run out in February, after which time we'll have to raise the limit or default.