A CPA’ View From The Fiscal Cliff

Submitted By Sean Boland | Principal at DS&B

Summer baseball games, cabin retreats, road trips, barbeques with the family, and tax policy? One of these (hint, the last one) seems very out of place with what will be on our minds in late summer this year. But as the election draws near and the discussion of a “Fiscal Cliff” heats up into a fever pitch, I think all of us will be drawn into wondering what kind of fiscal and tax policy changes are in store for our country. Even if you aren’t a CPA like me, paying attention to the politics and having a plan for your family and your business will be more important this year than in most election years I’ve seen.

The main reason to think about all this I’m referring to is the media-deemed “Fiscal Cliff,” which is when automatic spending cuts take effect and the bush-era tax cuts expire, resulting in an increase in taxes. The doom and gloom scenario is if Congress is deadlocked and fails to act on how to adjust our situation. Congressional Republicans and Democrats agree that they need to take action, but they disagree substantially on how to act. The presidential election between President Barack Obama and Governor Mitt Romney will only further the gap, as each searches for a populist solution along ideological differences.

So what does this mean to an individual, a business owner, or investor? Quite a lot. For starters, if no comprise or resolution is achieved, the bush-era tax cuts will automatically expire. Unless Congress acts, many tax breaks and incentives for individuals and corporations extended during The Tax Relief Act of 2010 will end. This affects:

  • Income-Tax rates would increase (although some believe the lower and middle class tax brackets will remain unchanged), with the maximum marginal tax rate rising from 35 percent to 39.6 percent, compounded by expiration of the 2 percent employee-side payroll tax cut.
  • Capital Gains would be taxed at a higher rate – a maximum of 20 percent for non-corporate taxpayers (currently its 15 percent).
  • Qualifying Dividends would be taxed at ordinary income tax rates – maximum of 39.6 percent.
  • The Federal Estate Tax rate would increase from 35 percent to 55 percent, with the exclusion amount reducing from $5 million to $1 million.

How do we plan for the possibility of change? I favor taking a hard look at your options right now, while you have time to plan with your CPA. As it stands now, the sun sets on the Bush-era tax cuts at the end of 2012 – but depending on what gets compromised in Congress these provisions could look a lot different even without the “Fiscal Cliff” (automatic tax cut expirations and spending cuts). Be sure to talk to your accountant about your specific situation, but here are some things to consider.

  • Capital Investments. Are you looking at any Capital Investments for next year? It might make sense to move some of those investments up this year.
  • Taking Capital Gains this year
  • Taking more income in 2012
  • Gift Tax, transferring to your children this year might have less of a hit.

The bottom line is this: Work with your accountant and figure out what your options are, and plan now so you can act in 2012. Given the complexity of this year’s election, having a plan for the “what ifs” is key to being able to act on any changes in time.

- Sean Boland is a member of Inner Circle Twin Cities, and a Partner at DS&B Certified Public Accountants, Consultants & Advisors in Minneapolis

Notice of Disclosure: Be sure to talk to your CPA before acting on any topics presented here. Any tax advice included in this electronic communication is not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.