The American Consumer's Fiscal Cliff

Taxpayers could get dinged with fewer deductions and higher taxes if Congress does nothing.

Danny Diaz, 3, rides in a shopping cart with his sister Brianna Diaz, 2, as they arrive with their mother for the Grand Opening of the new Walmart Neighborhood Market in Panorama City, California.
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Payroll tax. Taxes employers withhold from workers' paychecks are also in the mix when it comes to tax reform. Currently a payroll tax holiday is in effect reducing workers' withholding of Social Security taxes from 6.2 percent to 4.2 percent.

But that, too, is on the chopping block amid fiscal cliff negotiations and is set to expire in the new year. More taxes withheld each paycheck means workers have less take-home pay, which could impact their spending, experts say.

"For those living paycheck-to-paycheck, it definitely impacts spending," says David Abuaf, chief investment officer at Indiana-based Hefty Wealth Partners. "It would affect traditional household budgeting—maybe instead of blasting the A/C in the summer, it might mean only having it on medium to control utility costs."

Capital gains and dividends. For the millions of investors across the nation, the taxes paid on gains made from selling stocks and bonds could potentially go up from 15 percent to 20 percent. Even worse, the dividends companies pay their shareholders could soon be taxed as regular income. That means instead of the current 15 percent rate, if you're in the highest income bracket, the income you make from dividends could be taxed at the highest rate, 39.6 percent.

"I think we could see a shift away from dividend-producing [financial products] in the investing world," Abuaf says.

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  • Meg Handley is a reporter for U.S. News & World Report. You can follow her on Twitter or reach her at mhandley@usnews.com.


    Corrected on : Corrected 11/26/2012: A previous version of this article misspelled David Abuaf's name.