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Who's Afraid Of The Fiscal Cliff?

CliffDespite my tongue-in-cheek title, there are some major consequences of the country going over the so called fiscal cliff.  With just one week left for a deal to come together to avert a series of widespread spending cuts and tax increases, the latest news is that a deal appears to be unlikely.

Your Paycheck

The average household will see an increase of $3,500 in their taxes.  Payroll taxes will also go up by 2% (reverting back from a temporary reduction intended to stimulate the economy).  The full effect of this will not likely be seen until a few weeks into the new year, as employers and the IRS must make the transition to the new rates and employee withholding amounts.  Other special tax breaks enjoyed by families such as the Earned Income Tax Credit will be reduced as well.


Tax Refunds

It is estimated that the sudden change in tax rates, as well as the Alternative Minimum Tax, will cause delays for an estimated 100 million tax returns.  If you file taxes online you could mitigate delays.

Foreclosure Taxes

The Mortgage Debt Forgiveness Act is set to expire at the end of 2012.  Many expected an extension of the Act to be included in an end of year financial deal between the White House and Congress. Without an extension of the Act, there will be new and significant tax consequences for those that lose their home to foreclosure.  When a home is taken back by a lender in foreclosure, the home is sold.  In most cases the sales price is less than the outstanding mortgage balance. This difference represents the bank's loss. Up until 2007 this 'loss' was deemed by the IRS as income to the individual that lost the home in foreclosure.  


Approximately 50,000 foreclosures take place each month and most of these individuals will be facing staggering amounts of taxes. As an example, you have a $200,000 mortgage and your home is sold at auction by the  bank for $150,000.  This creates $50,000 of income that you will owe taxes on.  Depending on your marginal tax rate this would equate to $7,500 to $15,000 in taxes. 

 Job Cuts

Some estimates suggest that going over the fiscal cliff will cause a loss of more than 250,000 jobs. Most of these job losses are expected to take place in the defense industry, but will affect many providers of services to the government as well. 


Right now it appears that the odds of a last minute deal on the fiscal cliff are very slim, but who knows?  Our advice continues to be the same; stay out of debt, develop multiple income sources, build up your savings, and keep a close eye on your investments.

James L. Paris
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