Policy: Budgets & Deficits

What the 'fiscal cliff' means for you

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Politics,Opinion,Congress,Editorial,Taxes,Budgets and Deficits,Fiscal Cliff

If politicians fail to cut a "fiscal cliff" deal before Jan. 1, it means a lot less money in your pocket, period. This is especially true for lower-income earners, who will be hit hardest proportionally.

To illustrate the danger the fiscal cliff poses to Americans right now, at Christmastime, we used the Tax Foundation's tax calculator to produce a few examples of how Americans in various life situations will be affected.

Our first example is Manuel -- a young fellow who makes about $50,000 a year working at a newspaper.

Manuel, a single man with no dependents

What he pays now: $9,075

If we go over the fiscal cliff: $10,313

Difference: $1,238

Manuel's income tax rates will rise, and the payroll tax holiday will expire. As a result, he will pay an additional $1,238 in taxes -- and he'll see the difference immediately in his first paycheck.

Parents will be hit harder than people without children. Anne, for example, makes just $40,000 as a hospital receptionist, and she is a single mom.

Anne, single mom with one child

What she pays now: $4,268

If we go over the fiscal cliff: $6,048

Difference: $1,780

In addition to increases in her income and payroll taxes, Anne will lose out because the per-child tax credit will fall from $1,000 to $500. For her, that's a 42 percent tax increase.

Stephen and Alexandra -- a two-income family with two children -- would be hit even harder. He makes $60,000 as a firefighter, while her job as a Catholic school teacher pays $40,000.

Stephen and Alexandra, married with two children

What they pay now: $14,300

If we go over the fiscal cliff: $21,950

Difference: $7,650

Their tax bill goes up because they would not be allowed to claim the per-child tax credit and would have to pay the 26 percent Alternative Minimum Tax for part of their income. All told, their taxes would rise by $7,650 -- more than 50 percent -- to $21,950 per year.

The fiscal cliff also means that Uncle Sam will take a bite out of the retirement money many seniors rely on. An increase in the tax rate on investment income, combined with the move to tax dividends as ordinary income, means that Harold and Phyllis, a retired married couple, would see their taxes nearly double!

Harold and Phyllis, retired married couple

What they pay now: $3,395

If we go over the fiscal cliff: $6,638

Difference: $3,243

Their $15,000 in dividends will be taxed as ordinary income, and the rate on their $10,000 in investment income will go up, with astounding (and depressing) results. Their $30,000 in Social Security benefits and $20,000 in other income will also be taxed at a higher rate.

Wendy, a single woman with no children, makes $300,000 as the owner of a small construction business, plus $30,000 from capital gains and $10,000 from dividends. She faces a 17 percent tax increase.

Wendy, single small-business owner

What she pays now in taxes: $100,519

What she'll pay if we go over the fiscal cliff: $116,923

Difference: $16,404

Wendy's rates will go up, plus she will pay the new Obamacare tax on her investment income. The $16,404 in additional taxes she would pay could have otherwise been reinvested in expanding her business.

Fenton and Sarah, the wealthiest couple in this cast of characters, earn $750,000 in combined salary as a stock analyst and lawyer. They also have $250,000 in investment income, $50,000 in dividend income, two kids and a mortgage. These members of the fabled "1 percent" face a tax increase of $79,224, or 28 percent.

Fenton and Sandra, professionals with two children

What they pay now in taxes: $322,788

What they'll pay if we go over the fiscal cliff: $407,396

Difference: $84,608

The fiscal cliff will be very unkind to everyone -- including seniors, parents shouldering the enormous expense of raising children, and people in lower income brackets.

This is why it's important for Congress and President Obama to keep us from going over the fiscal cliff on Jan. 1.

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