The Fiscal Cliff

The term “Fiscal Cliff” has been read and seen a lot lately, but what does that even mean?

According to the Wall Street Journal the fiscal cliff is the combination of large spending cuts and tax increases that are scheduled to be automatically enacted at the start of 2013. Bush-era income-tax cuts will expire for tens of millions of Americans, and billions of dollars of spending cuts will take effect because Congress couldn’t reach a deal last year to reduce the deficit by at least $1.2 trillion over 10 years. Democrats want a combination of spending cuts and tax increases for upper-income households. Republicans want to cut spending but don’t want to raise tax rates, though they have signaled they would consider raising revenue through other measures, such as limiting deductions. Both want to avoid the fiscal cliff, because it forces severe cuts, particularly in military spending.

So what does that mean for the average consumer? What tax brackets will be affected? It basically means that the payroll-tax holiday, which we’ve been enjoying since the Bush-era now ends. This in turn means a tax increase for workers of as much as 2% of wages. Income-tax rates revert to pre-George W. Bush levels, rising not only for the rich but for nearly all taxpayers. In addition, some 26 million additional people face the alternative minimum tax, or AMT, next filing season, which would raise their taxes liability sharply for 2012, unless Congress acts. Also expiring: a variety of smaller tax cuts for both businesses and individuals collectively known as tax “extenders.” They include a tax credit for research and development and a deduction for sales taxes in states that don’t have an income tax.

As advisers, we constantly have to think not only about ourselves, but also our clients so from an adviser’s perspective this article from Financial Planning raises some great points.
So what are your thoughts? Are you thinking of emigrating to Canada or opening a nest egg offshore? Or have we reaped the benefits of Bush-era tax cuts long enough?