The “Fiscal Cliff” is the description some economists have used to describe the potential situation at the end of 2012 when several 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 in January 2013 some new taxes plus scheduled increases in income and estate taxes. Some Federal spending cuts are also scheduled to occur as part of the automatic spending cuts Congress agreed to in the Budget Control Act of 2011. The concerns are that all of these changes could lead to a double-dip recession. In other words a recession followed by a short recovery, then another recession in 2013.
What is involved with the fiscal cliff?
Automatic spending cuts are set to begin in 2013 in the following areas:
- Non-Defense areas such as education, food inspectors, air travel safety, etc
The Bush tax cuts expire including:
- Income tax rate increases
- Capital gains rates increase
- Qualified dividend rates increase
- Child tax credit is reduced
- American Opportunity Tax Credit expires
- Earned Income Tax Credit changes
- Marriage penalty relief expires
- Estate tax exemption decreases
- Gift tax lifetime exemption decreases
- Top estate and gift tax rates increase
Other tax changes include:
- Increase in the employee payroll tax withholding
- No Alternative Minimum Tax patch
- New 3.8% Medicare surtax
- New .9% Medicare additional withholding
Miscellaneous changes include:
- Unemployment benefits extension expire
- “Doc Fix” which is a cut in reimbursement rates that physicians receive for treating Medicare patients is implemented.
This is not intended to be a complete list.
We cannot predict the future or how the President and Congress will act. However, there are opportunities that are available before any potential changes occur.
Items to consider before 2012 year end:
- Did a Roth conversion take place?
- Capital Gains/Dividends: Discuss the 0-15% rates with your tax advisor
- Charitable donations: 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
Items to consider after 2012 year end:
Get updates on current tax information; estate and gift tax information, see your tax advisor as needed.