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What is the 'fiscal cliff'? What will happen to my taxes? Will I pay more next year?
Americans have a lot of questions about what will happen early next year. Here are some answers.
What is the fiscal cliff?
It is a combination of budget cuts and tax increases totaling approx $650 billion. Included are the expiration of the Bush tax cuts and across-the-board cuts to federal spending.
The Budget Control Act of 2011 said that if Congress did not come up with $1.2 trillion in savings over the next decade, there would be automatic cuts and tax increases in 2013.
Congress did not come up with the savings, so now, $200 billion in spending cuts and $500 billion in tax increases will happen unless a deal is reached soon.
What happens if a deal is not reached?
Experts say the impact would be equivalent to subtracting approximately 4% from the Gross Domestic Product. That could be enough to push the economy back into recession, at least in the short term.
Economists say the longer there is no deal, the worse the impact on the U.S. economy, Wall Street, and countries around the world.
If the country goes over the 'fiscal cliff' but Congress reaches a deal with the White House later on, the changes could be retroactive and taxes would remain the same.
Tax Changes
In addition to the end of the Bush tax cuts, several other changes in the tax code are set to kick in come 2013.
Some tax breaks for businesses and limits on the Alternative Minimum Tax are set to expire. Four million people pay the AMT, and unless Congress acts, the number could jump to about 28 million, according to the non-partisan Tax Policy Center.
The Payroll Tax Holiday, put in place during the recession, is scheduled to end. The holiday reduced payroll taxes from 6.2% to 4.2%. If it's not extended for a second time, workers will have an additional $1,000 a year in taxes removed from their paychecks.
Budget Cuts
Most analysts agree the Pentagon would see a 9.4% reduction ($55 billion) in its budget. That is in addition to $487 billion in already announced cuts for the Department of Defense over the next decade.
Civilian spending would lose about 8.2%, including a 2% cut to Medicare providers and additional cuts to programs like Head Start.
Other Issues
Congress must also come to an agreement on whether to extend emergency unemployment benefits and whether it will raise the debt limit in February.
*Information from the Tribune properties (LA Times, Baltimore Sun) and The Associated Press were used in this report.