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What's the 'Fiscal Cliff'?

We've got the definition — for this and 6 other terms you need to know about the looming budget debate

Uncle Sam hanging off a ledge, What you should know about the Fiscal Cliff when listening to the upcoming debates.

Will Washington allow the nation to fall off the fiscal cliff? Hang on and see what happens. — iStockphoto

En Español| Now that the elections are over, all the buzz inside the Beltway is about the looming "fiscal cliff."

AARP: No cuts to Medicare, Social Security in budget deal

As you scan the headlines or watch the news, you may be wondering what exactly the term means. And when you start to pay closer attention, you're likely to encounter even more Washington lingo that tempts you to turn off CNN and tune into QVC.

Put down that remote! This is important stuff that you really need to focus on. As Congress wrangles over balancing the federal budget, the big questions include whether (and how) to raise taxes and what spending cuts to make.

Potentially on the chopping block are Medicare, Social Security and veterans' benefits, plus just about every other federal program. To help you make heads or tails of it all, we've prepared a cheat sheet of terms you're likely to hear:

1. THE FISCAL CLIFF *

OK, the image is a little hyperbolic, but here's what's about to happen: Lawmakers and the president will once again try to deal with the worrisome fact that our nation spends more money than it takes in. If they don't reach an agreement, major tax increases kick in on Jan. 1. Major federal spending cuts are scheduled to take effect on Jan. 2.

(The reason? You may recall that last year Congress couldn't agree on a deal, so it did what it always does in such circumstances: It put off deciding, but did agree on a day-of-reckoning deadline to force a compromise down the road. That's where we are now.)

Pretty much everyone in Washington agrees that something needs to be done to keep our economy healthy, but just what? That's the $500 billion question.

* Depending on which wonk you listen to, you may also hear this referred to as the fiscal slope, the fiscal crisis or even the austerity bomb.

2. BUSH-ERA TAX CUTS

In 2001 and again in 2003, then-President George W. Bush successfully pushed to cut taxes for all Americans.

Because of the way the tax-cut deal was worked out, the cuts were to expire at the end of 2010. But for a variety of reasons, they were extended for another two years — which brings us to today.

The issue now: Should those cuts be extended again? For everyone? For just wealthy or middle-income Americans? No general consensus yet on any of this.

3. THE ALTERNATIVE MINIMUM TAX

Or, if you're really in the know, the AMT. Think of this as a kind of parallel tax system designed to make sure everyone — particularly rich people — pays his or her share of income tax.

Under the regular tax code, you're allowed all sorts of exemptions, deductions, credits and other adjustments, sometimes known as "loopholes."

Under the alternative tax code, not so much. You compare what you would pay under the regular code and the AMT and then pay the higher of the two, which means revenue for Uncle Sam.

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