Should We Really be Concerned About the Fiscal Cliff?
Before you dig in to todays post, Frugal Rules got some major love this week when we were featured in an article about foolish credit card spending. It was an honor to be included along with the co-founder of Wisebread as well as the Daily Money Shot. Head over to CreditCardGuide.com to read the article.
Last week Scott over at One Smart Dollar wrote a great article about the Fiscal Cliff and it got me thinking about what I have to say about the matter. First of all, just to be clear, the point of this post is not to make a political statement, blame one political party, or get into a political debate, but rather, to look at how the Fiscal Cliff would affect people like you and me. If we really do run over the Fiscal Cliff, few will be immune to the consequences of doing so.
What Exactly is the Fiscal Cliff?
If you’ve watched the news recently, or read it online you’ve almost certainly heard about the Fiscal Cliff. Many might brush it off as unimportant to them and go on with their day. This, however, is not news to be taken lightly as it has to do with taxes and how the U.S. government spends its money. Did I just say taxes? Yes I did. Who out there likes taxes? I know I don’t; as someone who tries to be frugal, I want to keep as much of my money as possible. But the fact remains that we live in a society where tax money is needed to take care of many things and we are all responsible to pay what the government says we owe.
What Will Happen?
Presidents Bush and Obama have implemented tax cuts. Many have been beneficial, some controversial, but most of us have benefitted from them. If we do go over this Fiscal Cliff, then many if not most of these tax cuts will expire. To gain an appreciation of how the Fiscal Cliff will affect you look at some of the tax cuts currently in place that might be cut:
- Child Tax Credit
- Lower payroll taxes
- Child and dependent care tax credit
- American Opportunity Tax Credit
- Lower dividend taxes
This may not seem like much, but the Fiscal Cliff will have an impact on nearly everyone. Recent studies are claiming that it will impact nearly 90% of taxpayers, many to the tune of hundreds if not thousands of dollars. Having a growing family, and one who tries to be frugal, I know that this could cause problems for many out there.
Not only does the Fiscal Cliff affect our taxes, but it is equally toxic to government spending. I am first to say that government spending needs to be curtailed, but drastic spending cuts taken along with the expiring tax cuts can lead to a harmful cocktail. Many economists have said that if this combination is allowed to take place we will go over the Fiscal Cliff and will lead to another recession sometime in 2013.
Is There Anything I Can do About the Fiscal Cliff?
The short answer to this question is no. The impending Fiscal Cliff can really only be solved by Congress. So, this begs the question…what is Congress doing about it? The short answer is nothing. They actually recessed last month, which is the earliest they have before a Presidential election in the past 50 years. You read that right, with such major things to be decided on, they decided to go home and try to save their jobs. (Isn’t that special?) This can’t be blamed on one party, both Democrats and Republicans alike left D.C. in an attempt to save their jobs but do nothing about the impending cliff. With that in mind, what can you do with the remaining 11 weeks in the year? Even though we can’t control what Congress does or predict the future, we can control what we do. Do what you can to save money, either in some sort of savings vehicle or Health Savings Account. If you like to invest in dividend stocks, consider doing so in a tax advantaged account. You would also be benefitted by looking for ways to bring in additional income these next few months. Before you make any decisions, make sure it’s done with reason and not based off of irrational fear.
What’s your take? Is this Fiscal Cliff talk all smoke, or is there fire behind it? What are your thoughts of the Fiscal Cliff and are you making any decisions based off of potential consequences?
Photo Courtesy of: Rob Chivers