What's at stake after falling off fiscal cliff

by Danielle Leigh

Source: NBC News on New England Cable Network: 

(NECN/NBC News: Danielle Leigh, Washington) - Congress is running out of time to reach a compromise that avoids the looming fiscal cliff.

If they don't, the new year will ring in massive tax increases and budget cuts-impacting nearly every American.

Tuesday, the chairman of the Federal Reserve, Ben Bernanke, stressed the importance of a solution.

Here’s what's at stake if congress doesn't create an alternative plan to cut the national debt.

Economists say Americans have two reasons to worry.  1) Their taxes would go up. And 2) The fiscal cliff could cause a second recession that will threaten millions of jobs.

Economists, including Bernanke, describe Jan. 1 as an economic disaster if Congress doesn't reach a compromise to cut the U.S. debt.

"A fiscal shock of that size would send the economy toppling back into recession," Bernanke said.

In addition to spending reductions -- roughly 500 billion dollars in tax cuts would expire --  without a deal.

"Beginning Jan, 1, everyone's paycheck is going to get smaller," said John Goodman of the National Center for Policy Analysis.

According to the Tax Policy Center, someone making $40-$65,000 a year would pay $672 more in payroll taxes and $1,328 more in federal income taxes a year.

The child tax credit would be cut in half and credits for students: reduced.

Additionally,  more than 30 million Americans could have to pay a tax Congress has traditionally protected them from, known as the alternative minimum tax.

"It is ensnaring a lot of middle class families," said Isabel  Sawhill, a Brookings Institution economist.

Financial advisor Ric Edelman says most Americans don't need to worry about their investments, such as retirement savings in 401-k's.

But a small group may want to consider selling certain investments because taxes on capital gains could increase 5 percent.

"Don't sell yet because it might prove unnecessary,” said Edelman.  But it let's you prepare."

Goodman says the recession Bernanke predicted could cost 2 million people their jobs.

"The weakest sectors will be hit the hardest,” Goodman said. “And the weakest sectors are the sectors where people don't have very many skills."

And those without work next year could receive less unemployment aid -- it's also being reduced as part of the fiscal cliff.