Main Street Park City 2012 2
Will the fiscal cliff affect Main Street, USA? Reuters

Congress is set to return to work for an abbreviated and typically unproductive session this week. But this time the nation’s eyes are on what – if anything – lawmakers intend to do about the impending so-called fiscal cliff, what many fear is a kind of fiscal superstorm of expiring tax cuts and across-the-board, automatic spending cuts that attack the sacred cows of both parties: defense spending in the case of Republicans and social spending in the case of Democrats.

The status quo would see the national budget lose about $109 billion. Meanwhile the discretionary budget (the part of the U.S. budget that Congress debates every year that exempts non-discretionary spending on Medicare, Social Security and Medicaid) would see $1.2 trillion cut roughly evenly from both defense and non-defense over the next nine years.

Doing nothing means everyone who pays federal income taxes will pay more because cuts made since 2001 would end and rates would return to pre-2001 levels. However, the economy is not as healthy as it was back then, and economists generally agree that some tinkering needs to be done to taxing and spending to avoid the poison pill that many economists agree could send gross domestic product growth into negative territory in 2013.

The issue of what to do about the combined tax cuts and across-the-board, automatic spending cuts has been increasingly weighing on the stock market as investors fret about worst-case scenarios. The Congressional Budget Office (CBO) has warned twice this year, most recently last week, that the fiscal cliff could send the country into recession.

The tax breaks at stake are largely part of President George W. Bush’s Tax Relief and Reconciliation Act of 2003, but they also include modifications made to the act since. Here are the taxes affected by the possible changes and how they affect you (or don’t):

-- Millions of middle-class and lower-middle-class households would feel the effects of the alternative minimum tax (AMT) for 2012. For example, an individual (single head of household) earning $33,750 a year would have to pay the AMT next year. Currently, the AMT applies to incomes of $48,450 or more, according to the D.C.-based Tax Policy Center, which also estimates that the average middle-income household (family with children) would pay about $2,000 more next year in taxes thanks largely to the alternative minimum tax. The AMT was created in 1969 as a way to prevent the super-rich from using loopholes to avoid paying any income tax. Next year this tax would affect people in the middle-class income range.

-- The exemption on the estate tax – what the government takes from the deceased wealthy as they bequeath their bounty to their next of kin – would be lowered from $10 million to $2 million. This tax affects very few families in America, even at the $2 million level, but is viewed by many in the Republican Party as an unfair tax on success. In 2010, 15,000 households had wealth levels that put them within range of the estate tax, according to the IRS. That was down from the 108,000 households that qualified before the threshold was raised. This tax would affect far more households at $2 million, but still a sliver of the 114.2 million households in America estimated in the 2010 U.S. Census.

-- The Bush-era tax cuts would expire, as they were intended to when they were first debated in 2001 as part of the Economic Growth and Tax Reconciliation Act, and ensuing legislation aimed at accelerating the Bush-era tax policies. If they expire, the nation’s wealthiest households would see their tax rates revert to the previous baseline 39.6 percent level, up from 35 percent. The bottom 10 percent rate would rise to 15 percent for the lowest-income levels. These tax rates affect anyone who makes enough money to pay a federal income tax and would also lower tax returns for those that do not.

-- Increase the child tax credit from $600 to $1,000. The credit was supposed to revert to $700 in 2005 but was extended at the $1,000 level through 2012. This tax affects most people with children, but would help low-income families the most because it refunds money to households whose income tax is lower than the credit.

-- The 2 percentage-point payroll tax cut that was extended last year would expire, causing an estimated 160 million workers to see more taken from their paychecks.

-- An end to unemployment benefits for the long-term unemployed. Coupled with a House Republican proposal to slash $15 billion from Supplemental Nutrition Assistance Program (SNAP) in the Farm Bill would mean the unemployed would find themselves with considerably less public assistance, even as the fiscal cliff is estimated to send unemployment back over 9 percent next year.