Beware the Fiscal Cliff

The fiscal cliff; pundits, newspapers and talking heads of every shape and size have been discussing it for months, yet many people are unsure about what it involves. Maybe you’ve heard of it and maybe you haven’t, but the stark reality is that the fiscal cliff is going to have an enormous impact on our economy and personal finances. What is the fiscal cliff? Simply put, it’s a catchy name for a series of tax increases and spending cuts due to go into effect for 2013. It’s a big deal. As your financial advisor, I feel it’s important to make you aware of what’s going on. • the Bush tax cuts are scheduled to expire • the payroll tax holiday is scheduled to expire • dividend and capital gains tax rates are scheduled to increase • new taxes associated with healthcare are scheduled to go into effect • automatic budget decreases are scheduled to go into effect The net effect of these changes will be increased taxes for nearly all tax payers at every income level, and less government spending. As you’ll see, these tax increases are clearly not limited to the “rich”; now defined as those earning more than $250,000. Following, is a synopsis of some of the more important tax changes that are scheduled for next year: Payroll Taxes Increase Full payroll taxes will return in 2013. Medicare Tax Increases The employee’s portion of the tax will increase by .9%; for high income earners (joint filers earning $250,000+) this tax is not capped. Income Taxes Increase Increases apply to nearly every income tax bracket for ordinary income, long-term capital gains and dividends. There is a new 3.8% surtax on the lesser of (1) net investment income, or (2) the excess of modified adjusted income over a threshold amount; $250,000 for couples filing jointly, $125,000 for married couples filing separately, $200,000 for single tax payers, and approximately $12,000 for trusts and estates. Itemized deductions phase-out as income increases. The top dividend rate rises from 15% to 39.6%. The Obamacare surtax raises the top capital gains tax rate to 23.8% (from 15% currently) and top dividend rate to 43.4% (from 15% currently). The Child Care Credit drops to $500 from $1000. The “marriage penalty” returns. The AMT (Alternative Minimum Tax) “patch” expires. The threshold for itemized deductions for unreimbursed medical expenses increases from 7.5% to 10%. Estate & Gift Taxes Increase The estate tax is scheduled to revert to an exemption of $1 million, per person, with a top marginal rate of 55% (an additional surtax applies to larger estates); for 2012 this exemption was $5.12 million, with a top rate of 35%. There are several strategies to employ in 2012 which may mitigate the impact of the scheduled tax increases. I have summarized them below: • Shift taxable assets to tax-deferred investments • Accelerate income • Complete large taxable financial transactions • Accelerate tax deductions • Establish and fund a retirement account • Maximize retirement plan contributions • Consider converting retirement plan assets to a Roth IRA • Review estate planning docs and strategies • Consider charitable gifts • Gift appreciated assets • Make lifetime gifts • Consider wealth transfer strategies • Explore life insurance trusts to pay estate taxes It is possible that Congress could vote, before the end of the year, to eliminate or reduce some of these increases. Either way, it is important that you are prepared. I have developed relationships with proven specialists during the three decades that I have been advising clients, so that I am better able to assist you. I also work closely with my client’s CPAs and attorneys, or can draw from my panel of experts. Here’s the silver lining: My team and I are constantly monitoring both the economy and the markets to make sure we stay ahead of whatever comes our way. As long as we feel staying in the market is in our clients' best interest, that’s what we’ll recommend. But if the moment ever comes when we feel it’s time to put their money into cash, then that’s what we’ll do. So that’s the scoop. It’s an important situation to keep an eye on. Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested.