The Fiscal Cliff : What Is It?


If you’ve been reading or listening to any news lately, you’ve probably heard people talking about the United States’ financial situation and an upcoming “fiscal cliff.”  What does that mean?

The phrase fiscal cliff is a new way of describing the effects of current laws that will result in tax hikes and spending cuts.  None of this is guaranteed to happen, but it will happen unless Congress make new laws to prevent it from happening.

Many believe that the use of the word cliff is too dramatic and would prefer that it be called a fiscal hill or a fiscal slope.  However, that wouldn’t sound nearly as exciting and wouldn’t really paint the picture of how many things could change in a small amount of time.  And, indeed, there are a lot of different things that contribute to this fiscal cliff.

Expiration of Tax Cuts

Many tax cuts are scheduled to expire on 31 December 2012.  If this happens, 2013 taxes will be significantly higher for nearly all taxpayers.  These cuts that are expiring, actually two laws that together are often referred to as the Bush tax cuts, accomplished the following:

This is a list of expiring tax cuts, not tax cuts that are coming.

All of these changes were written so that they were not permanent and were to expire on 1 January 2011.  However, in late 2010, Congress voted to extend them until 31 December 2012.  Without further extension or modification, all these tax cuts and changes will be gone on 1 January 2013.


Sequestration is a fancy way of saying “lots of mandatory spending cuts.” In August 2011, Congress passed the Budget Control Act of 2011 to avoid hitting the legally-defined debt ceiling.  In this Act, Congress raised the debt ceiling and prevented that one particular chaotic government financial disaster.  However, in the Budget Control Act of 2011, Congress also gave itself specific guidelines and deadlines for dealing with our country’s debt and budget problems.  Under the terms of the agreement, automatic spending cuts will occur beginning 2 January 2013.  These spending cuts will take around a trillion dollars out of current programs.  Half will come from domestic programs, and half will come from the military.

Lowering of the Child Tax Credit

The current $1000 per child tax credit is scheduled to revert to $500 per child on 1 January 2013.  This will increase tax bills for many families, including mine.

Increased Social Security Payroll Taxes

Working Americans are currently paying Social Security payroll tax at the rate of 4.2% of earned, W-2 reported wages up to $110,100.  This is  lower than the regular 6.2% rate due to cuts passed by Congress for tax years 2011 and 2012.  Social Security payroll taxes are scheduled to return to their usual 6.2% rate on 1 January 2013.  Social Security payroll taxes are part of the Federal Insurance Contribution Act (FICA) deductions made into law in the 1960s.  Therefore Social Security payroll taxes are listed on Leave and Earnings Statements (LES) or other payroll statements at FICA -SS, FICA – Soc Sec or something similar.

If this change occurs, working Americans will be contributing 2% more to FICA in 2013 than they did in 2012.  The limit for paying Social Security taxes increases to $113, 700 for 2013, meaning that the total amount of Social Security payroll tax will jump by $2,425 for employees who earn in excess of that amount, for a total tax of  $7,049.40 for those highly-paid employees.

There’s More

There are many other small aspects of the potential fiscal cliff, but they don’t apply to most military families.  They include the expiration of federal extended unemployment benefits, a change to Medicaid program payments, and new taxes imposed to pay for new health care laws.  I encourage you to learn more about these if they apply to you, but I will focus here on the items that apply to most of my readers.

Next in this series:

Congress can, and has, made last-minute changes to tax laws.  It is a distinct possibility that Congress will act to change some of these provisions before they take effect.  However, my motto is Prepare For The Worst, Hope For The Best.  Knowledge is the key to preparation, so it is important to know what the worst case scenario could be.

I will spend this week talking about changes that will happen if Congress does not act to prevent these changes from occurring.  If you have specific questions, please ask them in the comments.  I’ll try to address everyone’s concerns, so question away!

Also in this series:

 The Fiscal Cliff:  Your Pay

The Fiscal Cliff:  Your Taxes, Part I

The Fiscal Cliff:  Your Taxes, Part II

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.

    The Fiscal Cliff is when you get a bunch of Lazy Non Working F@cks who want something for nothing. They take from the productive members of society and feel entitled to what others have earned. Then you get the Makers who are sick and tired of getting raped by the govt in being ripped off via legislation/taxes, and having their money spread to those who have not earned it. This is where the split in the country comes from. Makers vs Takers! So far it looks as though the Makers are losing, and thus they quit investing and start hiding their money instead of investing it. They feel why invest and make $$ if its just gonna be taken (stolen) from them anyway. To be honest I dont blame them. When they go to cut entitlements they need to cut out welfare. They need to cut that which people have not contributed to. Social Security, Medicare, even Unemployment working people HAVE been paid for either the employers paid in to it, or the workers paid into it through deductions each and every check. They need to cut the welfare food stamp B.S. and all other B.S. assistance that one has not contributed to. I have personally seen generational welfare. One generation learns from the previous one how to scam the system.

    • -Opportunistic

      As this is a military site… viewed mostly by military members who are not impacted by these taxes. To be frank I don’t know many active duty individuals that make more than $110,100 in taxable income a year. Yes there are some, but the majority of us have actually used these exact government aids as part of our monthly living strategy. When my son was born I was making less than 20k and performing the exact functions of a contractor who was making 60k. Sure I had tax benefits and lived on base, but guess what… we used food stamps too and used California’s free college programs. Today I save the military about $200,000/Yr because I’m still Active duty.. 4% of the population are on welfare, 14% are on food stamps which includes and is being replaced by SNAP (Supplemental Nutrition Assistance Program), this includes food programs at schools and daycare centers. Yes you probably know people who use it, I know a lot of people who share your opinion and use it. My family used it. A household of 4 is eligible at $2498. That’s an E5 with over 4 years of service at Fort Campbell. With 4 children it’s an E6.


    • USMC3773

      Don’t know if you realize this, but the Oligarcy lumps us military folks as the 47% takers, so….I wouldn’t be talkin.

  • Opportunistic

    Yes I agree with you… there needs to be reform because there are people who take advantage (not the majority), but the general tone of makers and takers is far over the top and doesn’t match reality. These benefits help get people out of bad situations with the expectations they will help better our society. People need better management, they are not getting that from the system today. And the general tone doesn’t provide a solution.


  • Opportunistic

    The cliff doesn’t impact many of us financially… we will have to work harder to keep our missions successful with less, but that provides the benefit to the military member. We may actually learn how our systems work, how to maintain them and repair them organically again. It provides our leadership the opportunity to set priorities and the budget ensures that we actually mind our accounts and integrate better spending strategies. Every event in life is an opportunity, even these fiscally troubling times.



    The one thing the govt is suppose to do is provide SECURITY FOR THE NATION! We are not suppose to be handing out food stamps left and right. Also why is it you can buy a take and bake pizza from Papa Murphys on your EBT card aka food stamps..? Food stamps should be for the staples needed to sustain life not for the luxery foods such as take and bake pizzas, pop, chips etc. You want that extras in life earn it. Im tired of leeches dragging us down. I hope the rich do retaliate in the job markets, stock markets and anywhere else they can retaliate. I guess I was not brought up with the entitlement attitude. Like Ronald Regan said if welfare was the solution more and more people would not become dependent on it. I never understood how some people think they deserve some of what some else has earned. How do people feel entitled to someone else’s wealth..? Americans are very generous on their own good will. However once you try to take from them in a legislative form you will see them close up there checkbooks. You will see them move money around to avoid the govt getting its grubs on it. I cant think of anything the govt has ever ran or done successfully. They cant even compete with the post office against UPS or Fed Ex.

    • LukeInDC

      Because buying a large pizza will feed 4 people for less than the price of a gallon of milk and box of cereal. Milk is $4 in DC, a small box of cereal is $4-$5 unless its on sale. I can buy a large pizza at papa johns for $7.99 and no one goes hungry. And if you think people are “living it up on food stamps”, please go try using food stamps to feed your family. Or better yet, find out exactly what a family your size gets in food stamps and then use that as your food budget for the month. See how well you “live it up”. I really wish people would stop talking out the side of their necks about food stamps. We spend less on the SNAP program than it costs to maintain one aircraft carrier battle fleet. I am yet to hear a good explanation as to why we need more of those than the next 3 countries combined!


    I agree with getting rid of the foreign aid. Last I heard we still give foreign aid to China…? Don’t they own us now. Ya if there has to be cuts made start with foreign aid no one likes us anyway. Then welfare, I see to many people at Wal Mart wearing top of the line clothes, shoes, talking on nice smart phones loading their carts up with name brand foods. Then pull out the old EBT card (food stamps) when its time to pay. So we pay for their necessities while what ever money they earn they can spend on their wants. While I being responsible and not a F’ing leech have to buy my necessities first and if there is anything left my wants. So ya all welfare can go as far as I am concerned. Jobs there is always work if someone is willing to work. Granted they may not be the jobs anyone desires, or the pay they desire but hey you can hold your head up instead of your hand out. The ONLY entitlements should be those you have bought and paid for through deductions in your check that you earned through a JOB. This free ride welfare state has to stop its breaking the country.

    • LukeInDC

      You do realize that 1. you can get a top of the line phone for free with a contract. You don’t know what her phone bill is. Mine is $40 but I carry a Samsung Galaxy Nexus phone. 2. many of those same people actually shop at the thrift store where the rich dump their clothes and 3. Most of the “name brand” they are wearing are cheap Chinese knockoffs. Look closer before you judge. Her hair and nails may be done up but I’ll bet either she or her girlfriend do that for a living. And the EBT cards actually limit the foods you can buy to certain brands. You can buy skippy peanut butter but not Walmart brand peanut butter. You can buy Starkist Tuna but not the cheaper no name brand of tuna. Why? Because those companies participate in the SNAP program. In fact, sometimes, you’re not only limited to the brands you can buy but the size you can buy. So your card will pay for 2 15 oz jars of peanut butter but not the cheaper 64 oz jar. Please do your research and stop commenting on what you think you see. If you watch closely as they are shopping, they aren’t throwing crap in their cart willy nilly. They always have a list. And oh, you only get money once a month so you have to fill you cart.