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The Fiscal Cliff. What, Where, Why?

The fiscal cliff. Three little words we are sure you have become rather sick of, of late. But what does this simple trio of words mean? What are the effects of these four simple syllables and what, frankly, is the big deal?

fiscal cliff ahead

We are sure you have been pondering these questions lately. After all, the news is awash with horror stories; America’s media have almost gone into meltdown over some alleged metaphorical cliff.

What is this cliff?

Now, fundamentally, what is the fiscal cliff? This is a simple metaphor, describing a line, of which to cross would cause America’s economy to take a massive turn for the worse. You thought things couldn’t get much worse, though, right? The cliff in this analogy represents the accelerated decline of US fiscal policy following the crossing of this line.

At midnight on December 31st the Budget Control Act of 2011 ends, and with it, the parameters put in place to save the US from the recession two years ago also come to an end. The result is an overall hike in income tax, resulting from several different legislation changes coming in to effect at the same time.

Firstly, the tax cuts from 2001-2003 come to an end. These Bush-era tax cuts will spell bad news for many families, causing reduced tax benefits for families who have children, a larger income tax, a marginally higher estate tax and increased taxes on much of your investment income.

Alongside these, Obama’s temporary payroll tax cuts come to an end, coinciding with an increase in both income tax and capital gains taxes for higher earners. That’s not all, however, as 2013 is the start of President Obama’s health care law taxes, adding yet another costly tax to your monthly bill.

What will be the outcome of the end of these stringent tax cuts, though?

It would appear that the most affected (predicted) shall be those on each end of the economic spectrum. Very high earners and those earning less than average will be the hardest hit. For example, a person earning $1,000,000 per year can expect to see a tax increase of around $120,000.

However, those earning around $30,000 per year mark could expect an increase of around $1,200. Granted, in relation, $1,200 may not seem a lot (a sickening 1 percent, in fact), but really, can you afford to drop that from your salary next year?

Finally, the eligibility to earn federal unemployment benefits will come to an end at the closing of 2012. Those relying on this as a source of income due to the already exacerbated economic climate in America will find it especially hard come January.

Fundamentally, total failure to act on this by the government will result in some pretty dismal times ahead for the average American. For example, real economic output is predicted to drop by around 0.5 percent in early 2013 (compared to the last three months of 2012).

This dip in GDP is predicted to affect the employment levels in the USA also, pushing up the total percentage of the labor force out of work from its current level of 7.9 percent to well over 9 percent.

How did it get to this?

You may be wondering how it all got so wrong. Surely something could have been done earlier to prevent the country driving head first over a cliff. Hasn’t anybody seen Thelma and Louise? Well, the fact is, Congress has been trying to address the situation for some time.

It is unfortunate, however, having only succeeded in implementing measures to push the date back. There-by burying their heads in the sand, so to speak. Unfortunately, America’s political dichotomy has done little to mend tensions regarding this contentious issue also, proving to only flare animosity between the two ideologies and prevent actual progress.

Fundamentally, the Republicans favor measures such as public spending cuts to counteract fiscal deficits, whereas Democrats generally lobby for tax increases – while ostensibly supporting a reduction of funds spent on the defense budget.

To effectively counteract the problems these two opposing political parties need to reach some sort of agreement and compromise. A hotly contentious issue currently is how to extend the Bush-era tax cuts, which would go some way toward preventing America Thelma and Louise-ing off of the iconic Mt. Rushmore.

Republicans are favoring an extension of tax cuts across the board, whereas the Democrats are pushing for a more regulated approach, that of doling out tax cuts to all save for the highest 2 percent of earners.

Where ever you stand on the split podium that is American politics, one thing is certain – something must be done. Therefore, with this in mind, most analysts are expecting some type of compromise to be met in the very near future. Thereby saving America from slipping back into the recession it has been clawing its way out of for the last several years.

Whatever your plans for the future, take a moment to consider how your current situation may fare come January, assuming the worst. It may be wise to put whatever money you may have safely away in case you will need it in the near future.

It would also be wise to analyze your economic situation, especially for entrepreneurs and small business, services such as Coles-Law debt recovery will be a wise consideration to get any disputes resolved as soon as possible.

Stay positive, however. Congress is working hard to ensure economic stability throughout 2013 and so the chances are a compromise will be met.

Mortgage Trends To Look After The Fiscal Cliff

When you are trying to assume the condition of the real estate market in 2013, paying attention to mortgage is important. Pertaining to mortgage, a major change is going to be implemented in a few weeks from now, that of a new law, which should come into effect.

Understanding real estate pricing trends in 2013 and especially the condition of the mortgage market is largely dependent on the anticipated changes this new law is supposed to bring.

Budget Control Act

The new law is the Budget Control Act of 2011, which has been pre-planned for generating more tax income by levying more taxes on various income groups. Among the various proposals mentioned in the Budget Control Act, there is a particular proposal, which places a ceiling on the mortgage interest deduction rate.

Agencies like the National Association of Realtors apprehend that if the proposed measures are to go into effect, home values can get decreased by a major 7-15%.

There is a lot of confusion about these proposed changes though and the law is facing strong opposition from various interest groups, so it remains to see which way the law will take in the future.

In discussion are the write-off mortgages and the write-downs mortgages. These two essential elements of mortgage calculations are going to play a major role in 2013, as the experts are suggesting.

What are the differences between write-offs and write-downs? The write-offs are essentially direct Federal Government solutions and they involve substantial tax breaks on loan modifications, especially the home loans.

The write-downs, on the other hand, originate from the lenders of mortgages like the banks and the federal government has a little direct role to decide their formulations.

Mortgage Write-off System

A proposed fiscal cliff solution is that of winding off the entire mortgage write-off system so that more revenue is generated from the homeowners. In write-downs, mortgage lenders waive 10-20% of the mortgage loan burden from underwater homeowners, trying to recover their debts.

Homeowners, struggling with mortgage debt, will, of course, want to see the two options brought into effect, but there is little chance that something like that could happen.

The present Federal funding for mortgage principal write-offs is due to disappear on December 31. This funding originated according to the Mortgage Debt Relief Act of 2007, that allowed struggling homeowners to avoid the Federal Taxes on any residential mortgage principal, which has been forgiven by the lender as a part of the modifications on the home loan.

However, this legislation is due to expire very soon, and that could easily be a piece of sinking news for many homeowners, who could face high tax bills from IRS on the taxes that have accumulated on the erstwhile amounts of mortgage loan forgiveness.

However, this development is not yet certain as there is constant support from both Democrats and Republicans to prolong the write-offs, to provide support for the struggling homeowners.

As for write-downs, the whole situation seems gloomy as well, as there is not much the  Government and President Obama could impose to force mortgage lenders to streamline write-downs, however, some steps are being taken. For instance, the Federal Government has already tripled the financial incentive amount to mortgage institutions to 63 cents upon a dollar.

This has supposedly convinced top lenders to implement $10 billion mortgage forgiveness debt for the underwater homeowners struggling to save their homes. This $10 billion is from the $25 billion foreclosure agreement between the largest bank and mortgage lenders and the attorney generals of all the 50 states.

What remains to be seen whether the implementation of policies provides some relief to struggling homeowners.

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