Debt Ceiling Limit Increase Voted Into Law: What Does This Mean for Taxpayers

On the evening of July 31, Congress reached an agreement to raise the 14.3 trillion debt ceiling and reduce federal spending, instantly giving the Treasury 400 billion additional borrowing power.  In May the debt limit was reached, however the Treasury Department said it could keep government functioning normally until the close of August 2. Congressional leaders came to an agreement and the Senate raced to get the debt ceiling increase signed into law just hours before the deadline. Americans anxiously waited as our economy was faced with the possibility of government default.

What is the Debt Ceiling?

The Debt Ceiling has been all the buzz for the past 5 months, but what is it exactly?  The debt ceiling is the legal limit set by Congress that can be borrowed by the federal government.  The cap or legal limit applies to debt owed to the public and to federal trust funds.  Public debt can be in the form of bonds issued to the public by the Treasury.  Federal trust funds are funds such as Social Security and Medicare.  Federal law requires Congress to authorize the government to borrow any money that is needed to pay for programs Congress puts into place.  The maximum legal limit of 14.3 trillion was reached back in May so it was necessary to pass a bill to raise the debt ceiling so that the federal government could continue to borrow funds and pay debts owed.

How Is the Debt Going To Be Reduced and How Will I Be Affected?

Congress is cutting government spending by 2.4 trillion over 10 years.  The cuts will occur in two stages with 900 billion in cuts being enacted immediately.

The second stage of cuts will be enacted by  a “Super Committee” who will be chosen by Congress by mid-August.  The “Super Committee” will be  made up of 6 Democrats and 6 Republicans who will be responsible for cutting 1.5 trillion from the federal deficit within 10 years.  They will be responsible for coming up with a package which includes spending cuts and/or tax legislation.  Congress will be responsible for voting on the entire package by Thanksgiving.  If an agreement is not reached by then, the new law requires 1.2 trillion in automatic (mandatory) cuts.

The “Super Committee” could call for tax reform or increases, but the new law does not require these tax changes.  Many senate leaders are optimistic that debt reductions can be achieved without tax reform.  Specific items being cut are unknown at this time, but I will continue to keep you posted on debt ceiling updates and how it affects you.

No matter what decisions are made, you can quickly get an estimate of your taxes so you know where you stand.  Check out our free tools, like TurboTax TaxCaster available online, via iphone, or android.

Here is an update on the “Super Committee“