Heading for the cliff?

03 Nov


Tax (Photo credit: 401(K) 2012)

With the 2012 election just days away, one piece of news that seems to have slipped off of the front-page headlines is the “fiscal cliff” that is fast approaching.  Don’t feel bad if you’re not entirely sure what that term means, you are in good company.

It probably doesn’t surprise you that our lawmakers have avoided making hard fiscal decisions for years.  Hard decisions don’t make good sound bites.  Sooner or later though, if you don’t make the decision it gets made for you.  In a nutshell that is what has happened with the fiscal cliff.

Over the last few years whenever our legislators failed to agree on long-term solutions to our fiscal problems they punted the ball to just after the election. (Convenient, eh?)  The decisions they left unmade will result in the following in early 2013:

  • Expiration of Bush-era tax cuts
  • Across-the-board spending cuts (“sequestration”) to most discretionary Federal programs
  • Reversion of the Alternative Minimum Tax thresholds to their 2000 tax year levels
  • 2% Reduction in Medicare reimbursement rates
  • Expiration of the 2% Social Security payroll tax cut
  • Expiration of recent extensions to Federal unemployment benefits
  • New taxes imposed by Healthcare Reform

All of that adds up to about $500 billion in tax increases and $100-200 billion in spending cuts.  Even in an era with deficits runing into the trillions, that’s nothing to sneeze at.  The Congressional Budget Office estimates that all of these items put together would have a net drag of 4-5% on GDP next year, tipping the US economy back into recession.

I’m not Chicken Little, and I’m not saying the sky is falling (yet).  Most likely congress will take some action to mitigate the impact or at least “cushion the fall”.  But even if they do you should start thinking now about the long term implications for your business and personal finances, and you should probably be strategizing with your tax advisor.

H. Lee McFarlain, Jr.

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Posted by on November 3, 2012 in BLOG, Business


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