The Fiscal Cliff Explained

By Lindsey Yates | 

You hear figures such as billions and trillions of dollars but when it comes to the Fiscal Cliff what does it mean for the money in your pocket.

First lesson in Fiscal Cliff 101, what is the Fiscal Cliff?

"The Fiscal Cliff is two events happening at once. It's the expiration of any tax cut implemented since 2001, and it's the automatic reduction in government spending at the same time,"says Jeanne Fisher, Financial Planner.

President Obama says his longstanding proposal is aimed to take some weight off the shoulders of the middle class.

"The democrats are wanting to tax the wealthy. They're wanting to increase the taxes and see the tax revenues go up particularly on the wealthy individuals,"says Fisher.

On the other side....

"Republicans do not necessarily believe in a large government but they want all that government spending to go down. They're recognizing that they have to compromise but the republicans are wanting more spending and the democrats are wanting more taxes,"says Fisher.

If an agreement is not reached what does this mean for you?

"In a nutshell it's really going to affect everyone. 90% of us will see tax increases next year. Quite a few of us will feel the sting of the government spending cuts. Maybe it's through the military or through the unemployment extension. There are quite a few people who will feel that sting,"says Fisher.

And one of the first stings...

"If the Payroll Tax Holiday ends were going to see about a 2% increase in taxes out of our paycheck,"says Fisher.

In the high stake poker of the Fiscal Cliff negotiations it's hard to determine if a compromise will be reached, but here's how you can keep track based on a 1 to 3 ratio.

"For every $1 of tax revenue there needs to be $3 cut in spending. If you want to keep score you want to see what the ratio of tax revenues versus cuts. I the ratio is greater or more in favor of tax revenues than the democrats are winning. If the ratio is more in favor of spending cuts than the republicans are quote un quote winning,"says Fisher.

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