I want to begin by describing what this means. It is a slowdown of the economy due to a kind of perfect storm of factors, all falling within the scope of federal spending cuts and tax increases. Here are a few factors contributing to the fiscal cliff. The highly anticipated 2002 Bush tax cuts will end leaving capital gains, dividends, and estates to be taxed at a higher rate. Then, you have an increase to corporate and payroll tax rates. Not to mention, the alternative minimum tax is estimated to affect a larger number of households. Meanwhile, taxes related to the new health care law will take effect and spending cuts surrounding the debt ceiling agreement from 2011, automatically reducing spending, all happen simultaneously. Thus, the perfect storm, comprised of taxes going up while spending is reduced. Much like what companies did when the recession hit, reduced expenses (spending) and increased prices (tax revenue).
So what do you need to consider:
- We never know what may happen with Congress but based on House Speaker John Boehner’s comments there may be some concessions made regarding raising revenue and tax cuts. So, you may want to evaluate gains you have achieved in your non-retirement accounts. No matter what you may feel getting taxed at 15% is better than at a higher rate.
- Evaluating your estate plans and possible gifting strategies for assets to heirs in a lower tax bracket. This year individuals can transfer up to $5.12 million — or $10.24 million for married couples — free of estate and gift taxes.
- If you do not have a trust, now may be a good time to consider one especially under current tax laws.
- Businesses may want to pay bonuses and dividends this year instead of next year since you know what the tax rates are and there is a question mark as to what they will be in 2013.
- Carryover losses should be evaluated to see if it would be better to use them now or later when taxes may be higher.
I share these points as ideas to think about. You really need to sit down and discuss all them with your financial planner, CPA, and estate attorney. If I can be of assistance to you or someone you know, feel free to reach out to me at [email protected] and I would be happy to help.
(Special Note: No matter what side of the fence you are on, the S&P has been up 64% since President Obama took office.)
