I Am Not Afraid of The “Fiscal Cliff”…

Hysteria! How many times do we need to be manipulated before we recognize that once again the media has whipped an issue into the level of Armageddon?  Does anyone remember the Y2K frenzy that came – and went – without event? Now that the Presidential election is over, we are again being blasted incessantly by the media about the so-called Fiscal Cliff. Is there anything to this, or is it once again media’s attempt to boost their ratings?

As I’ve delved into the facts of the pending tax changes and spending cuts, I am thinking that the “fall off the cliff” may just be a short stumble for most of us. The impact does not warrant the amount of fear that has been whipped up by the image of a “fall”.

And, although the cliff may turn out to be just a small mound for most of us, it seems to me that our real concern should be our Country’s inability to solve an issue that affects us all. As we move farther from the ability to solve issues in a timely fashion using good manners and respect for the opinions of others, frustration mounts in this country. This inability for resolution by our elected officials is our greatest danger!

Rather than relying on the media frenzy, I have been focusing on clear facts and developing a list of considerations that we should all be making before yearend.  Fortunately, I’ve been helped by a very clear article from Allianz Insurance Company of North America.  I’m pleased to share with you the information directly from their article.

What is this so called “Fiscal Cliff”?

The “Fiscal Cliff” is the description economists have used that describes the potential situation at year-end 2012 when a number of U.S. tax and fiscal changes are scheduled to occur. This “perfect storm” of change includes the expiration of the Bush income tax cuts at the end of 2012, and starting in 2013 some new taxes and scheduled increases in income and estate taxes. Federal spending cuts are also scheduled to occur in 2013 as part of the “sequestration” results (an automatic form of spending cutbacks in Congress) from the Budget Control Act of 2011.

If lawmakers cannot agree on how to address the pending issues, trillions of dollars of tax increases and spending cuts will go into effect beginning in January of 2013.  The fact that all those changes are scheduled to happen at once, leads to concerns that those changes could mean a double-dip recession (a recession followed by a short recovery, then another recession) in 2013.

There are many components (this is not meant to be a complete list)

1. Automatic spending cuts are set to begin in 2013 in the following areas:

  • Defense
  • Non-defense areas such as education, food inspectors,
  • Air travel safety, etc.

2. The Bush tax cuts expiration includes:

  • Income tax rate increases
  • Capital gains rates increase
  • Qualified dividend rates increase
  • Child tax credit reduced
  • American Opportunity Tax Credit expires
  • Earned Income Tax Credit changes
  • Marriage penalty relief changes
  • Estate tax exemption decreases
  • Gift tax lifetime exemption decreases
  • Top estate (and gift) tax rate increases

3. Other tax changes include:

  • A return in employee payroll tax withholding to the “normal” level of 6.2% (from 4.2%)
  • Other tax extenders not enacted including the AMT patch
  • A new 3.8% Medicare surtax on investment earnings
  • A new .9% Medicare additional withholding for individuals with a Modified Adjusted Gross Income (MAGI) above $200,000, and married couples that exceeds $250,000 of MAGI.

4. Miscellaneous changes include:

  • Unemployment benefits extension expire
  • The “Doc Fix” which is a cut in reimbursement rates that physicians receive for treating Medicare patients (which has never been implemented to date)

It is possible that Congress may still negotiate on spending cuts and tax changes so that no major changes occur. Alternatively, Congress may not act at all and let the automatic cuts occur. Regardless of how Congress deals with these issues, I plan to stay up-to-date with information to help our financial situations. I encourage you all to consult others on your team now, your tax advisor and your estate planning attorney, if needed, to review your estate plans.

Items to consider before 2012 year end:

  • Did you do a Roth IRA conversion? If not, there are several calculators online
  • May need to discuss ordinary income tax rates at 10 – 35% with your tax advisor.
  • Capital Gains/Dividends:  May need to discuss capital gains/qualified dividend rates of 0 – 15% with your tax advisor.
  • Charitable contributions: No itemized deduction phase-outs.
  • Gifts: $5.12 lifetime gift tax exemption and $13,000 annual gift tax exclusion.
  • Nonqualified annuities: If appropriate for your situation, may provide income-tax deferral of earnings and retirement savings.

Regardless of whether the tax changes and spending cuts are implemented or not, the Fiscal Cliff will be memorialized by our country’s leaders glaring inability to resolve important issues. My New Years’ Resolution is being made early this year. “I will not focus on the hysteria of the ‘fall’ or any other exaggerated news story foisted upon us by the media. Instead I will focus on ways to help our elected officials find and implement meaningful resolution strategies.”

Imagine That™”!

Written by R. J. Kelly – October 2012

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