016 WF: The Fiscal CLIFF and Why You Care

WealthFast Podcast show

Summary: The media is obsessed with the fiscal cliff. Major cable networks are naming their features "Fiscal cliffhanger!" and "Countdown to the crisis!" So you're wondering: Just what is the fiscal cliff, anyway? How will it affect you? The “fiscal cliff” is a catch-all phrase that describes a series of tax increases and spending cuts that will take effect on January 1. The tax increases, which come in the form of the expiration of the Bush tax cuts, will raise both the income and investment taxes for the majority of middle-class and upper-class people, although the households earning more than $250,000 will feel the biggest burden. Small businesses structured as an LLC or an S-Corp are taxed at the household level. When people discuss “households” earning more than $250,000 per year, they’re also talking about mom-and-pop businesses taxed as households. If the tax cuts expire, the majority of taxpayers and small businesses will pay higher tax rates. This might hurt the economy, because people and businesses will have less money to spend. Furthermore, a round of spending cuts will also go into effect. These cuts take place in two stages. The first stage is characterized by a $1 trillion reduction in funding to almost every agency that gets federal money. That $1 trillion reduction will be paced out over the next decade. Oh, and guess what? That portion of the spending cuts has already gone into effect. The other part of the spending cuts -- the part that happens if we "fall off" the fiscal cliff -- promises an additional $1.2 trillion in spending cuts. This might hurt entitlement programs, which distribute money to lower-income people, who then spend that money, stimulating our economy. This also might hurt jobs in the government sector. And as you can see from this chart, jobs aren't doing so well right now ... Photo Source: Business Insider Want to learn more about the fiscal cliff? Tune into this week's podcast. And by the way, are you curious to know this week's Think Rich Tip? It's to be aware of your political and macro-economic environment. Pay attention to policies that can have a dramatic effect on your investments.