The Fiscal Cliff: What It Could Mean for You

By Diana Palmieri

No matter who you are, it will be impossible to avoid the pain.  The looming fiscal cliff will affect everyone who pays income tax–and even those who don’t.  Here are some eye-opening statistics of what could be:

• Federal tax collections would jump by more than $500 billion in 2013, more than 20 percent.  Nearly 90 percent of all households would face tax increases averaging $3,500.  Middle income taxpayers would see an increase of about $2,000 on average.  Almost every tax cut enacted since 2001 will effectively expire, and new taxes enacted in 2010’s Affordable Care Act will take effect in 2013.
• In addition to raising average tax rates, the cliff would raise marginal tax rates (see charts below).  The average marginal tax rate would increase by about 5 percentage points on wages and salaries, about 7 percentage points on long-term capital gains, and by more than 20 percentage points on qualified dividends. 

(Source:  Tax Policy Center)

Tax cuts under the extension of the Bush-era tax cuts for all

Tax brackets under the expiration of the Bush-era tax cuts for all

(source:  www.forbes.com)

So, looking at these charts you can see that if the Bush-era tax cuts are allowed to expire in 2013, the 10 and 25 percent tax brackets are effectively eliminated (on chart 1 highlighted in yellow).  What does this mean to you?  If you were in a 25 percent tax bracket, you are moved up to the 28% tax bracket (highlighted in blue on chart 2).  (Note: These tax brackets are before any of your allowable deductions.)

And if the increase in taxes were not enough, according to the Congressional Budget Office (CBO), up to 3.4 million jobs could be lost, increasing the unemployment rate to 9.1% from the current 7.9%.  This could potentially push us back into a recession.

Then there’s the across-the-board spending cuts to defense and domestic programs that could total $85 billion, according to the CBO.  These cuts in may include the following:

• 10 percent in defense spending, which will cause job losses among civilian Pentagon employees and major defense contractors. Spending on weapons will also be cut.
• Highway funding, aid to state and local governments, and health research will drop by about 8%.
• FBI and other law enforcement.
• Education grants to states and localities.
• Air traffic controllers.
• Extension of unemployment benefits (about 2 million people will be affected).

All of this creates uncertainty.  Uncertainty leads to U.S. companies to delay hiring and spend less money.  Uncertainty makes us as consumers wary, thus not wanting to buy anything but the basics and put off vacations. The breakdown in negotiations among our leaders may cause further turmoil in financial markets (remember the 700 point market in the fall in 2008?).  Nobody likes uncertainty.

While all of this seems very ugly, keep in mind your long-term investment goals and objectives.  Many economists and experts in this field seem to think negotiations between our leaders will bring forth some positives, avoiding most doom and gloom I described above.  Standard & Poors analysts, according to a CNBC.com article from 11/8/12, give a 15 percent chance that the fiscal cliff will happen. 

Donald Marron, director of the Tax Policy Center, states, “It would be nice if we could … address these issues before the very last moment.”  I couldn’t agree more.

The information contained in this newsletter is not intended to constitute legal, accounting, tax, investment, consulting, or other professional advice or services.  For specific information that applies to your circumstances you should consult a qualified tax advisor.

Diana Palmieri is dually registered with Vanderbilt Securities LLC and H Beck Inc., which are unaffiliated.  Securities offered through Vanderbilt Securities LLC, member SIPC/FINRA/MSRB.

Diana Palmieri is dually registered with Vanderbilt Securities LLC and H Beck Inc., which are unaffiliated. Securities offered through Vanderbilt Securities LLC, member SIPC/FINRA/MSRB. 

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