Published December 25, 2012
Call it the not-so-happy new year.
Unless Congress wrangles a deal in the next few days, Americans will ring in 2013 with champagne, funny hats -- and a knock-you-off-your-feet cocktail of tax hikes.
The Washington-imposed financial headache goes beyond higher taxes. Due to the inaction on Capitol Hill, certain industries could be hit particularly hard by budget cuts and millions of taxpayers could be held up in filing their 2012 returns.
Here is an overview of all the ways the failure of Washington to reach a compromise could impact you:
Wondering why passions are so heated in Washington over the looming fiscal crisis? The answer: $536 billion in tax increases.
That's what's in store next year without legislation to avert or curb them. Together, they amount to the largest tax increase in American history.
The biggest hit comes from the roll-back of the Bush-era tax rates. Families making between $50,000 and $75,000 would see taxes jump roughly $2,400, according to one non-partisan study.
As part of that jolt, investment taxes would rise as well -- the capital gains rate would rise from 15 to 20 percent for most. Dividends would be taxed like regular income, as opposed to a flat 15 percent rate. And the estate tax would expand to catch more and more families.
The financial pain doesn't stop there. A short-term Social Security payroll tax cut seems likely to expire no matter what, with the rate rising on Jan. 1 from 4.2 percent to 6.2 percent.
And the so-called alternative minimum tax -- a provision originally meant to ensure the wealthy pay a minimum amount to the government, but which has over time affected middle-class families -- would expand to 28 million more taxpayers without an agreement to avert it. The average increase? $3,700.
Spending cuts, threatened jobs
Congress last year drafted a $1.2 trillion set of spending cuts so devastating, so unbalanced that it was supposed to motivate lawmakers to come up with a more reasonable deficit-reduction plan. They never did. As a result, the first installment of $110 billion in cuts is poised to hit next year. Half of that hits defense, and half hits other federal departments.
For the Pentagon, that means a roughly 9 percent budget cut. At the very least, this threatens contracts for the thriving defense industry. Across the government, though, some federal workers could be furloughed or laid off to cope with the cuts.
The combination of steep cutbacks and steep tax hikes is expected to have a broader impact. The Congressional Budget Office predicts the country could lose up to 3.4 million jobs.
Jobless benefits for the long-term unemployed are set to expire next year. The maximum 73 weeks in state and federal benefits will fall to 26 weeks, which could affect 2 million jobless Americans.
IRS filing frustration
Because of the confusion over the alternative minimum tax, millions of taxpayers may have to wait until mid-March to file their 2012 returns. The IRS, which had assumed Congress would simply avert that provision, notified Congress last week that up to 100 million taxpayers will have to wait to file if nothing is done - the IRS needs time to overhaul its computers.
Stock market jitters
Uncertainty and fear are rarely good for Wall Street. After House Speaker John Boehner's "Plan B" tax bill was abruptly pulled from the floor last week, the big stock indexes fell roughly 1 percent on Friday.
Traders will be watching carefully over the next several days to see whether lawmakers can reach an agreement. Failure to do so could shake the markets.
Health care hit
Absent an agreement, Medicare rates paid to physicians will fall nearly 30 percent Jan. 1.
Beyond that, a slate of ObamaCare-tied taxes are set to go into effect no matter what. This includes a 3.8 percent surtax in investment income for top earners, and a .9 percent Medicare payroll tax hike on households making over $250,000.
And, while lawmakers in both parties are now lobbying against it, a 2.3 percent tax on medical devices is on the books for January. The industry, though, has raised numerous red flags about this fee, because it is imposed on gross sales -- meaning the actual impact on profits is far higher than 2.3 percent.
The Associated Press contributed to this report.