The Fiscal “Cliff”

If you’ve opened a newspaper or watched the news lately you’ve probably been bombarded with news about the Fiscal Cliff. So, what is it and how might it affect you?

What is it?

The Fiscal Cliff is the term people are using to refer to a large group of U.S federal tax increases and spending cuts that are due to take effect in 2013. The tax increases and spending cuts are so drastic that many economists will say a double-dip recession and further increases in unemployment would be imminent. How we got to this point would be better explained in another (much longer) post.

On Tuesday, January 1^st, after multiple series of negotiations, Congress finally reached a “deal” which preserved most of the Bush-era tax cuts and extended many other lapsed tax provisions. Nothing like waiting until the last minute, right?

Some of the major tax provisions that may affect you and your family are highlighted below.

• The top income tax rate has increased from 35% to 39.6%. This will catch you if you are an individual making more than $400,000/year ($450,000 for joint filing).
• The estate and gift tax exclusion will remain at $5 million indexed for inflation, but the tax rate increased from 35% to 40%.
•  The dividend and capital gain tax rate increased from 15% to 20% for individuals making $400,000+ ($450,000 for joint filing).
• The child tax credit and the earned income tax credit were both extended to 2017.
• The AMT patch was extended and will be indexed for inflation going forward.
• The employee paid portion of the Social Security tax will go back to the 6.2% rate, previously it was 4.2%

These are just some of the high points, but there are many other pieces to the fiscal cliff puzzle, especially if you own a business. I think the worst case scenario has been avoided but investors should review the effects of this bill in detail so they know how it will affect their investments going forward.