Here Comes the Fiscal Cliff!

If lawmakers cannot agree on how to address the pending “fiscal cliff”, and why would we think they would, $7 trillion worth of tax increases and spending cuts will begin to go into effect in January. So how can you and your business plan for this? And what does it mean?

At the end of 2010, Congress extended the Bush tax cuts through December 31, 2012. These cuts include income tax reductions, credits, and other opportunities that have been in effect for almost a decade. If no action is taken by lawmakers, the tax cuts will expire to previous levels.

Tax Increase

Almost all Federal tax brackets will increase by 3% to 5%. The 10% bracket falls off and now becomes the 15% bracket, the 25% bracket becomes the 28% bracket, and this continues until the highest Federal income tax bracket is just below 40%. This is hard to plan for, but it may be advantageous to delay large deductions or purchases for a business until next year.

In addition, long-term capital gains rates increase from 15% to 20% including an higher rate in certain situations for high earners. In addition, all dividends will be taxed at your ordinary income rate no matter how long the asset has been held. With this in mind, individuals and business owners may consider selling an asset that has significant appreciation this year to take advantage of a potentially lower long-term capital gains rate.

Deductions and Credits

Many deductions and credits Americans are used to will fall by the wayside. Here is a list of just a few of the more common provisions that will be affected: Child tax credit is cut in half, dependent care expense credit will decrease, the marriage penalty is back, FICA tax holiday goes away, itemized deductions will be reduced significantly, and Section 179 provision that allows direct write offs of capital expenditures will be reduced.

What’s Next?

If the tax cuts expire, increased taxes will affect everyone – individuals, business owners, wealthy, and poor. As the end of the year gets closer, additional planning may be needed for business owners and individuals. McNab Financial collaborates with CPAs to determine what is the best course of action given current economic and policy related issues.

At this point, the responsibility falls on our lawmakers to come up with a solution or extend the tax cuts for a short period of time so they can come to an agreement.

Kevin McNab

This article is written by Kevin J. McNab. Kevin is President of ACE Wealth Partners, LLC and is a CFP®, ChFC®, and CRPC®. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by ACE Wealth Partners, LLC unless a client service agreement is in place. If you have any questions regarding this Blog Post, please Contact Us. Please read our website DISCLOSURE carefully for additional information.