On Jan. 1, 2013, when the terms of the Budget Control Act of 2011 take effect, the United States will face what has
been referred to as the “fiscal cliff.” In general, this refers to widespread tax increases and spending cuts that will
occur if the tax cuts put in place by former President George W. Bush expire as scheduled.
Congress is working to negotiate a deal to avoid the fiscal cliff but faces significant challenges in reaching a
compromise. If a deal cannot be reached, the economy could be significantly impacted: the U.S. could face another
recession, unemployment rates could skyrocket and many individuals and businesses could suffer the effects.
However, reaching the fiscal cliff would cut the federal deficit and some sources say negative effects would be gradual
and could be addressed after Jan. 1.
Effects of the Fiscal Cliff
If Congress does not agree on a solution to the fiscal cliff issue, a number of tax changes will go into effect Jan. 1,
Across-the-board individual income tax rate increases (ranging between 3 and 5 percent);
Dividend tax rate increase to ordinary tax rates (15 percent increased to 39.6 percent);
Increase in capital gains tax rates (15 percent increased to 20 percent);
Expiration of Alternative Minimum Tax (AMT) patch so that more households will pay the AMT; and
Increase in estate tax rates and decrease in exclusions (35 percent with $5 million exclusion increased to 55
percent with $1 million exclusion);