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How the Fiscal Cliff Could Affect You

You've probably been hearing a lot about the "fiscal cliff" - the mammoth confluence of tax increases and spending cuts that will take effect after Jan. 1 unless President Obama and Republicans agree on a new deficit-reduction deal. It's complicated stuff, and you might be wondering what it's all about.

Here's a breakdown and a look at some of the ways it could affect you.

Spending cuts

  • Across-the-board spending cuts, (the so-called sequestration) were mandated by the budget deal struck last year to end the standoff over raising the nation's debt limit.
    • The good news is that benefits for Social Security, Medicare and Medicaid are exempt.
    • The administrative sides of those programs, however, aren't exempt. That could mean slower processing times, and for Medicare service providers - doctors, hospitals, skilled nursing, and so forth - it means a 2 percent cut in payments.
    • Other programs that you might rely on for delivered meals, food, transportation and housing are subject to cuts
  • Medicare payments to doctors will fall 27 percent. By law, when Medicare costs outpace economic growth, Congress has a choice: cut doctors' pay or appropriate additional funds. Since 2003, Congress has passed temporary "doc fixes" to keep reimbursements stable. Failure to do so again means a major cut for doctors on top of the 2 percent cut from sequestration.
  • Emergency unemployment benefits, which extend compensation up to 73 weeks after state benefits run out, would end for more than 2 million people.


Tax increases

  • Bush-era tax cuts, extended by President Obama in 2010 as part of a broader package meant to protect a still-fragile economy, will expire. In effect, this increases taxes across all income levels, though the biggest increases would be on the highest earners.
  • The "payroll tax holiday," a 2-percentage-point cut in Social Security withholding enacted in 2010 to help stimulate consumer spending, will end. An average-income worker will take home about $20 less a week.
  • The number of people subject to the Alternative Minimum Tax, an income tax device designed to snare rich people, would rise from 4 million to 30 million, including many middle-income taxpayers.


Economic slowdown

Some predict a fall from a fiscal cliff, others a softer tumble down a fiscal slope. In any case, if the government is spending less and taxing more, there's less to stimulate the economy. The nonpartisan Congressional Budget Office warns of a return to recession. Here's the CBO's projected toll for 2013:

  • 9.1 percent unemployment rate, up from the current 7.9 percent
  • a 0.5 percent drop in the gross domestic product, a rough measure of the economy

Gridlock is by no means unprecedented in Washington. One thing Republicans and Democrats can agree on: If they can't get their act together and find common ground for a better plan to cut the budget deficit, there will be serious consequences for the economy.

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