We’ve all heard about the so-called fiscal cliff until we’re blue in the face. We know it’s not good and we know it means more taxes should the Bush tax credits expire. We also know the politicians are bickering back and forth. Other than that, many simply don’t understand the dynamics or what they really mean. This week, we take a look at the latest news about the fiscal cliff, what it means and how it will affect you, your family and the way you pay your monthly obligations. First things first, though – what is the fiscal cliff?
We’ve heard about the Bush-era tax cuts; they were put into place for a limited time and they will expire, unless Congress acts, at midnight New Years Eve. This mean we’ll revert to a 2001-esque tax environment, President Obama’s 2 percent payroll tax cut holiday will expire and a series of other temporary tax cuts for businesses – especially small businesses – that Obama enacted will end. This includes child credits, earned income credit and limits on how we’ll be able to itemize our deductions on our taxes.
All of that is fine and good, but this where the explanations stop in many discussions. Here are four specific credits that affect families and the details associated with them.
Note: It should be noted that the low-income families could see much bigger tax bills – to the tune of thousands of dollars if these tax breaks expire.
Child Tax Credit
If you’re a low income family, you could lose up to $1,000 for each child you have due to the Child Tax Credit that will expire. Not only that, but if you are able to qualify for more than one family tax break, you’ll see cuts in those as well. This highlights the seriousness of what’s coming. These tax breaks are applicable for children under the age of 17. You may remember that President Bush put the Reconciliation Act in place, which increased the $500 break per child to $1,000. Once President Obama was elected, he opted to extend that credit through the end of 2012. Not only that, but for those families whose incomes were even lower, they were able to take the difference in cash once they’d knocked out all other liabilities associated with their taxes. If it expires, the break goes back to $500 and families with less than three children will be able to claim it. A family that has two children could end up having to pay that other $500, which means $1,000 comes out of their bottom line on their tax filings.
Child and Dependent Care Tax Credit
Parents who are either working or are actively looking for a job can now take advantage of a $3000 break for all of their child care expenses. And it is applicable for two children, which means currently, these parents of two children are getting, in essence, $6,000. If it expires, parents will then be able to claim just $2,400 per child.
Earned Income Tax Credit
This is an especially important break for families and if it expires, those same millions will find themselves living at or below poverty level. In fact, the government estimates that this credit has kept millions out of poverty because it allowed them to hold on to more of what they earn. It’s based on how many children you have. A joint tax return that shows a combined income of less than $50,270, along with three or more children can receive close to $6000 a year. Not only that, but if you’re filing a joint return with a total income of less than $19,190, this tax credit kicks in this way, too. The credit totals $475and three or more qualifying children can receive up to $5,891 this year. If a married couple doesn’t have any qualifying children but has income below $19,190, the maximum credit drops to $475. If the credits expire, married couples will see the lower income levels that applied before the Bush credits kicked in.
American Opportunity Tax Credit
Finally, President Obama’s American Opportunity Tax Credit was geared to assist low income families as they sought to find ways to cover college expenses. This allows for a $2,500 credit every year for college – up to four years. You may recall 40% of that was deemed refundable via cash with the remaining amount applied to tax liabilities. It too will be one of the programs virtually eliminated if the new year rings in with no efforts made to ensure they don’t expire.
Remember, these are just four examples of what we can expect to see on January 1. Whether or not these credits will fall to the wayside depends entirely on Congress. If you’re feeling frustrated that the deadline is nearing quickly and that Congress doesn’t appear to be acting to ensure these credits don’t expire, you’re not alone.
One North Carolina business man, Erskin Bowles put it this way,
People are never going to understand how critical this particular time in history is. We have $7.7 trillion worth of economic events that are going to hit America in the gut in December, and in Washington they’re doing nothing about it.
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