(Adds details from latest survey)
* Consumer sentiment falls to lowest in four months
* Expectations tumble on fears of possible tax hikes
* High-, low-income families more worried than middle-income
* Most homeowners report rising home values since 2008
By Richard Leong
NEW YORK, Dec 7 (Reuters) - Americans' outlook on the economy and their finances took a turn for the worse in early December, likely due to anxiety about the potential for higher taxes resulting from contentious discussions in Washington over fiscal issues, a survey released on Friday showed.
The Thomson Reuters/University of Michigan's preliminary reading of its index of consumer sentiment plunged to 74.5 in early December, the lowest level since August.
It was far below November's figure of 82.7 and the median forecast of 82.4 among economists polled by Reuters.
"Confidence plunged in early December as consumers confronted the rising likelihood that political gridlock would push the country over the fiscal cliff," survey director Richard Curtin said in a statement. He was referring to concerns of an economic contraction next year if the White House and Congress fail to reach a budget pact by year-end.
The "fiscal cliff" is a series of federal spending cuts and tax hikes worth $600 billion that would phase in next year if Washington does not take action to change the situation. Economists say the "fiscal cliff" could cause a U.S. recession.
One in four consumers mentioned hearing about prospects for higher taxes when asked to identify what economic news they had heard, the latest survey data showed.
Consumers' mood is seen as a predictor of their spending, which accounts for two-thirds of the U.S. economy. The steep drop in confidence at this time bodes poorly for retailers who count on year-end holiday shopping to boost their bottom line.
The survey's barometer of current economic conditions edged down to 89.9 in early December from a November final reading of 90.7. Economists had forecast a stronger reading of 91.0.
The survey's gauge of consumer expectations tumbled to 64.6, also its lowest level in four months. It was far weaker than the 77.6 at the end of November and an expected figure of 78.0.
The measure of consumers' 12-month outlook also fell hard in early December. It dropped 22 points from late November to 75, the lowest level since August.
The survey's one-year inflation expectations rose to 3.3 percent from 3.1 percent, while the survey's five-to-10-year inflation outlook inched up to 2.9 percent from 2.8 percent.
A bright spot in the glum report was that one in four home-owners reported rising home values, the highest proportion since January 2008 and further evidence of an improving real estate market.
YEAR-END TAX, JOB ANXIETY
Breaking down the survey households by income, the drop in confidence was most pronounced among the top third and bottom third, while the middle-income ones showed a small decline.
While much of the attention on the tax fight in Washington has been on the wealthiest Americans, the payroll tax holiday is also a part of the talks and affects far more workers.
"While a spending reduction from tax hikes on top income households can be anticipated, it will not influence confidence or spending as much as the end of the payroll tax holiday," Curtin said.
Confidence among middle-income families fell 3.9 points in early December from late November. Confidence among low-income households and top-income ones fell 9.0 points and 12 points.
Increased worries about the labor market also undermined confidence in the economy despite evidence to moderate hiring.
The survey suggested job worries intensified to their highest level in a year as Americans reckoned companies might either hold back on hiring or fire workers in response to the possibility of higher income taxes and costs related to the federal Affordable Healthcare Act, dubbed Obamacare.
"This prompted consumers to significantly lower the pace of economic growth they anticipated and resulted in the majority of consumers to expect bad times financially in the year ahead as well as economic relapses over the next five years," Curtin said.
Earlier on Friday, the Labor Department said the U.S. jobless rate fell to 7.7 percent in November, the lowest in nearly four years, although the decline stemmed from more Americans giving up on looking for work in tough job climate. (Reporting by Richard Leong; Editing by Chizu Nomiyama)
Also on HuffPost:
Residential Energy-Efficiency Credits
No tax breaks for being green in 2012. Homeowner investments in energy-efficient double-pane windows or high-efficiency refrigerators, <a href="http://www.energytaxincentives.org/">don't get any tax benefit</a>. More than 43.5 million Americans have filed and received this benefit, with an average reduction in tax liability of $765.84, according to H&R Block.
Mortgage Insurance Premiums
Bad news for homeowners: They cannot write off mortgage insurance premiums on 2012 tax returns. Congress can act to reauthorize these deductions retroactively to Jan. 1, 2012, and extend them through the end of 2013, but that would cost the government $1.3 billion over the next decade, the <a href="http://articles.latimes.com/2012/oct/07/business/la-fi-harney-20121007">Los Angeles Times reports</a>.
Taxpayers who have out-of-pocket adoption expenses or who adopted a child with special needs can only claim the adoption credit to the extent of their tax liability. While the portion of the credit not taken into account in 2012, up to $12,650 per child, is carried forward to future years, the benefit is no longer fully refundable, according to tax experts.
Alternative Minimum Tax
If the alternative minimum tax legislation is not retroactively patched for 2012, current law could result in an increased tax liability for up to 34 million Americans. According to a study by the Tax Institute at H&R Block, an average family making $85,000 with children in college could see their tax liability soar from a $1,056 refund to owing $1,400.
American Opportunity Tax Credit
Tuition bills will be higher starting on Jan. 1 because families will lose the $2,500 American Opportunity Tax Credit, which ends in 2012 unless Congress takes action. More than 2.4 million Americans claimed this deduction in 2009, resulting in a combined decrease in taxable income of $5.4 billion, according to tax experts.
Payroll Tax Credit
Paychecks will be smaller starting Jan. 1, 2013. An American making $50,000, for example, will lose $80 in monthly pay after the credit ends. The temporary credit also has lowered the amount workers contributed to Social Security by 2 percent.
Educator Expense Deduction
Teachers lose their $250 maximum deduction on expenses related to buying school supplies. This credit expired at the end of 2011, and teachers won't be able to claim this benefit on their 2012 taxes unless Congress takes action. In 2009, more than 3.8 million teachers claimed this benefit for a combined deduction of $9.7 billion, according to H&R Block.
Sales Tax As An Itemized Deduction
Taxpayers will no longer have the option of claiming an itemized deduction for state sales tax in lieu of state income tax. This expiration will have a greater impact on taxpayers who reside in a state with sales tax, but no income tax, including Alaska, Florida, Texas, Nevada, Washington, South Dakota, and Wyoming.
IRA Retirement Funds
Taxpayers over age 70½ no longer have the option of directing their income from an IRA distribution to a charitable organization. Starting this year, older taxpayers must include the distribution in income and claim a charitable deduction, resulting in a potentially higher tax bracket and a need to itemize instead of claiming the standard deduction, according to H&R Block.
As if losing all those tax credits was not bad enough, the earliest date to file a 2012 tax return electronically has moved back to Jan. 22, 2013. As the IRS has indicated that refunds could take as long as 21 days to process this year, a refund in January to cover Christmas credit card payments, winter heating bills, or rent is unlikely.