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Should We Really be Concerned About the Fiscal Cliff?

Fiscall 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

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally

Latest posts by John Schmoll (see all)

30 Comments

  • I am overwhelmed by the thought of the fiscal cliff…and well, pretty much everything that is going on with our country right now. It is out of my control so I am trying not to worry about it. If my taxes do indeed go up I will just have to find a way to cut back in other ways.
    Holly@ClubThrifty recently posted…How I Saved at Least $50,000 by Buying New FurnitureMy Profile

    • John says:

      It can be overwhelming Holly, but you’re right in that there really is not a whole lot we can do about it right now. I think it’s inevitable for our taxes to go up, so it just means we have to look for other ways to save money.

  • I definitely think the massive debt our government has incurred is a serious issue. Even worse is that they devalue the dollar and essentially “print money” to fund our massive expenditures…and we still fall short of balancing our budget! It’s a real issue that more people need to look into (myself included).
    DC @ Young Adult Money recently posted…Pros and Cons of Working for a Non-ProfitMy Profile

    • John says:

      I totally agree DC. I think it all provides for a toxic blend that is not good. The sad thing is that it’s going to take years to make up for it or we risk passing the debt on to future generations.

  • If you haven’t been over to http://demonocracy.info yet you really really really should. It visualizes the debt as trucks, football fields and even sky scrapers. It’s really interesting, although depressing stuff and it helps people to understand just how dire the situation really is.

    Great post John!
    Glen @ Monster Piggy Bank recently posted…Fruit and Vegetable GardenMy Profile

  • Thanks a lot for mentioning my article, John. This is a really important issue that a lot of people might not understand. It could end up having a lot of negative effects on many.
    Sean @ One Smart Dollar recently posted…Year-End Charitable Gifts and TaxesMy Profile

    • John says:

      Not a problem Sean. I think a lot of people don’t understand the situation, which could be dangerous depending on how the situation turns out.

  • Jason @ WSL says:

    I’d be shocked if Congress met and decided to extend the tax cuts before the year is out. It’s certainly possible, but they’re all looking to increase taxes and letting these tax breaks expire won’t be the end of the world. The reality of the situation our country has put itself in means we HAVE to all pay higher taxes. Frankly, we just need to suck it up and make it work…regardless of the taxes that are placed on us.
    Jason @ WSL recently posted…Understanding Long-Term Care Insurance QuotesMy Profile

  • John says:

    I totally agree Jason, on both counts. I hate paying taxes, but I know I like to drive on roads and use other things that tax money provides for. I agree that we will have to pay higher taxes, I really don’t see a way around it.

  • Veronica Hill says:

    I used to be able to buy a lot more travel for my dollar, now that has changed dramatically. The way our govt. spends on crap like wars and military, I’m scared to find out what happens when we reach that inevitable collapse. I can’t wrap my head around who’s thinking what over there and why nothing is being done. If they think the expiring tax cuts are going to help us get out of debt – think again. Ugh, its so frustrating! I’m keeping all of my options open. If this country goes down the drain I won’t go down with it. Hello Europe!
    Veronica Hill recently posted…He Got a Job, I Interview Him!My Profile

    • John says:

      I know it can be frustrating, especially when politicians on both sides of the aisle won’t put the politics aside and work on a solution. I agree that the expiring tax cuts won’t entirely solve the problem. They’re just a part of a much bigger issue that needs to be worked on.

  • Nurse Frugal says:

    I think it’s crazy that the government doesn’t know how to balance the budget. I am fearful that the uncontrollable spending that is taking place will continue to negatively effect my taxes. Someone needs to put them through a Dave Ramsey class.
    Nurse Frugal recently posted…How to throw a budget party?My Profile

    • John says:

      I completely agree. However, I doubt just a Dave Ramsey class will do the trick. They need to kick some, if not all, of the special interests out and actually do some work.

  • I believe this is an important topic. I took a slightly different angle on it on a post for Life and my Finances – which I believe is scheduled to come out this Friday.
    Marie at FamilyMoneyValues recently posted…Banking Perks for the AffluentMy Profile

  • Edward Antrobus says:

    I look at it as taxes aren’t being raised, they are being restored from an excessively long holiday. The only two parts that actually affect me are payroll taxes and the marriage penalty. What it means in reality for us is that our paychecks will be a few dollars smaller than they were before.
    Edward Antrobus recently posted…Why We Have Separate Finances (Sort of)My Profile

    • John says:

      Good point Edward. We have enjoyed them for quite a few years. I think, on the whole, many of us will feel this in greater detail than just in our smaller paychecks over the long term.

  • Big dividend investors need to realize that the tax rate on dividend income may increase. You may want to regigger your portfolio after the new tax law changes are finalized.

  • From an investment standpoint I maintain about 25% of my portfolio in cash for specific instances like this. If we do indeed “fall of the fiscal cliff” the stock market will likely plummet because people will over react to the unfortunate news. When that happens I plan on buying stocks on the cheap. I definitely do not want the fiscal cliff to happen but I’d be foolish to think it wasn’t possible.

    • John says:

      That’s a great point Marvin. Just like buying the fear, basically. I keep about 20% in cash myself for instances just like this…not that I want us to fall off this cliff though.

  • It is a scary thought. I’ll just have to find a way to make or save more money to pay the increased taxes we’re sure to see at some point. I’m not sure they will let everything expire at once, but it has to change eventually. Congrats on to Frugal Rules on your serious love this week.
    Kim@Eyesonthedollar recently posted…Moving from Employed to Self Employed, What Am I Forgetting?My Profile

  • John says:

    It can be Kim. I think it just calls us to prepare as much as we can so we’re not completely blindsided.

  • Savvy Scot says:

    Our taxes are mad in the UK. Currently I pay income tax at 40% which will eventually become 50% in the higher band. In addition we still pay national insurance and Value Added Tax etc. Time for you guys to play catch up
    Savvy Scot recently posted…10 Crazy Safety Facts You Never KnewMy Profile

    • John says:

      That is fairly high for taxes, at least compared to the States. But, you get many other things that we don’t in return. I’ve heard thsat the healthcare in the UK is awesome compared to ours.

  • Jason Clayton | frugal habits says:

    The other one being tossed around is eliminating the mortgage credit. That would hammer so many middle class families, I can only image the cliff we would drop off.
    Jason Clayton | frugal habits recently posted…Five Ways to Help your Kids Learn about MoneyMy Profile

    • John says:

      That’s a great point Jason, if you itemize. I know that we take advantage of it and can only imagine what it would do to other middle class families. I would, of course, love to see it stick around but I think some changes might be necessary. Make they could do something like cap the income level or something. Regardless, it has the potential to hurt many families.

  • Terry says:

    To offer the contrarian perspective, I see this as more of a short term issue. Once the economy revitalizes a little more, rising revenues will take care of the debt.

    It seems every 5 or 10 years the country is faced with some insurmountable economic obstacle, yet when the economy perks up, it goes away.
    Terry recently posted…5 Steps to take if your house is floodedMy Profile

    • John says:

      Interesting take Terry. If the worst case, as is being communicated as possible, I am not certain that it will be a short term issue. That said, I agree that rising revenue along with increased consumer spending would help spur things more.

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