Warning: 'Fiscal cliffs' may be ahead
A combination of the expiring George W. Bush tax cuts and elimination of many deductions and credits may put Americans and the economy in dire financial straits.
Tess Vigeland: I've gotten used to Chicken Littles running around and shouting about stuff. U.S. government debt downgrades! Debt ceiling debates.
This time it's the so-called "fiscal cliff." The tax breaks President George W. Bush authorized are set to expire at the end of the year. And at the same time, some deep federal spending cuts are set to kick in. It's all several months away, but pundits are already panicking about what could happen to the economy.
So let's hear what it might mean for you and me. Here's our senior business correspondent Bob Moon.
Bob Moon: Here's the very latest: In recent days, some lawmakers have taken the first steps to avert such a disaster.
Tax planning expert Greg Rosica has been watching this play out for the accounting firm Ernst & Young.
Greg Rosica: We're dealing with bills being introduced this week to try to get various extensions in place. And so, you know, then you start to think, well, there's a chance that it won't be the way it's scheduled to be Jan. 1, but it may be something yet different, and in between, perhaps.
But Congress is notorious for pushing tax decisions to the last minute, so Rosica says you should be thinking through what adjustments you might have to make to your lifestyle.
Tax expert Kay Bell at Bankrate.com says the first hit would rattle most everyone: Americans now pay just 10 percent on the first $17,000 earned. But that's set to automatically go back up to 15 percent, with progressively higher rates the more you make. And you won't have to wait until tax filing time to feel the pain.
Kay Bell: When the tax rates expire at the end of this year, that would be immediate -- first paycheck that people got in 2013, with the new higher rates.
...Based on the taxes withheld by your employer. Which means, Bell suggests, there will be two fiscal cliffs. Many taxpayers could encounter more trouble the following year when tax returns come due, because a whole host of deductions and credits could be gone.
Bell: A lot of the things they probably would not be aware of until they went to fill out their 1040s and went, "Whoa, what happened to that tax break?"
One of the deductions set to be reduced has long provided relief from the so-called "marriage penalty." Bell says Congress adjusted the amount of taxed income to keep married couples from having to pay higher rates when they file jointly -- and that relief would disappear.
Bell: So when that goes away, that could cause those married couples to end up paying a bit more tax.
Parents have been able to take a big credit right off the top for each child, but Bell says that's set to be cut in half.
Bell: The child tax credit is now $1,000 per qualifying child. If the Bush tax cuts expire, it will go down to $500 per child.
The list of looming tax changes goes on, including some that aren't part of the so-called Bush tax cuts. Ernst & Young's Greg Rosica says you'd be wise to look into which ones apply to you, so you can be quick to respond.
Rosica: If you're looking at a change, for example, in the taxes on dividends and you have very significant dividends, you know, then you might look to whether there's different types of investment or different types of income that you ought to arrange your financial affairs to generate.
All this uncertainty is already making Americans less confident about spending, and Bankrate's Kay Bell fears holiday sales could slump if Congress hasn't decided by then.
Bell: People can't plan their own personal finances and taxes. This fiscal cliff is as much psychological as it is actual economic concern. We're all just watching Congress juggle these things and worrying which balls they're going to drop.
Ultimately, experts say, what happens will come down to a key body of other decision-makers: American voters, when they choose which direction they want the country to go.
I'm Bob Moon for Marketplace.