What is the Fiscal Cliff




The Fiscal Cliff is a term used to describe the end of what is known as the Bush tax cuts.  Bush tax cuts are changes that were made to the United States tax code during the presidency of George W. Bush.  These changes were never meant to be permanent, they were enacted as a temporary method to stimulate and grow the economy.  Bush tax cuts began in 2001, broadened in 2003 and 2005 and were set to expire in 2010.   They were extended by President Barrak Obama in 2010 and are now set to expire December 31, 2012.  There are two parts to the Bush tax cuts:

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)

Both acts lowered the tax rates for nearly all U.S. taxpayers.

Many people attribute much of the rise in income inequality, the rich getting richer and the poor getting poorer, to the the Bush Tax Cuts described above.

Major Elements of Bush Tax Cuts

• Tax brackets under the Bush Tax Cuts lowered the percentage of taxes paid by all Americans. Taxpayers pay their taxes according to six tax brackets:  10%, 15%, 25%, 28%, 33% and 35%
• If the Bush Tax cuts expire without a replacement the six tax rate brackets will be replaced by five new brackets with higher rates: 15%, 28%, 31%, 36% and 39.6%.
• Lower taxes on Long Term Capital Gains and Dividends is the part of the Bush Tax Cuts that provide the wealthy with the greatest tax cut benefit but provides very little relief to the middle class and poor. Under the Bush Tax Cuts the maximum federal rate on long-term capital gains and dividends is 15%. If the Bush tax cuts expire with no replacemenbt the maximum rate on long-term gains will increase to 20% and the maximum rate on dividends will jump to 39.6%
• Right now, the standard deduction for married joint-filing couples is double or 200% the amount for singles. If the Bush tax cuts expire without a replacent the joint-filer standard deduction will only be 167% of the amount for singles.
• If the Bush tax cuts expire with no replacement a phase-out rule could eliminate up to 80% of a higher-income individual's itemized deductions for mortgage interest, state and local taxes, and charitable donations. and eliminate all or some of higer income individuals personal exemption deductions.