Fiscal Cliff Details

It is a moderately Happy New Year. Congress has passed, and the President has signed, the new revenue half of a solution to the fiscal cliff. The new bill, passed 257-167 by the House and 89-8 by the Senate, provides clarity on tax rates for most U.S. households, but delays major decisions on fiscal spending until the end of February.

It makes Bush tax cuts permanent for households with income below $450,000 (couples) and $400,000 (individuals), and on income above that amount, raises marginal rates from 35% to 39.6%. It creates a permanent fix to the Alternative Minimum Tax (AMT) for the next 10 years. It increases estate tax rates from 35% to 40% for estates larger than $5 million. It helps the long-term unemployed by extending expiring jobless benefits. And, the major impact to working people, it allowed the temporary 2% reduction in Social Security payroll tax to expire, returning to the previous rate of 6.2%.

There are certain things we’d like to make you aware of from a financial planning perspective:

•   This first one is time-sensitive. The IRA direct transfer to charities deadline has been extended to the end of December 2013 for those who are 70½ years old and older. For those that took an IRA distribution between December 1, 2012, and December 31, 2012, and wish to transfer all or a portion of your distribution to a Charity (up to $100,000), you may do so by February 1, 2013. Also, for the month on January 2013 you may make a rollover and have it count as a 2012 rollover. There are several dates to be aware of and a transition rule in case you forgot to take your Required Minimum Distribution last year.

•   The rise in income tax rates on the highest earners and on dividends may influence your ratio of taxable to tax-deferred accounts and the types of investment vehicles in your portfolio.

•   The increase in the estate tax rate adds certainty that was missing in estate planning because of the pending expiration of the old rates. Estates that are affected should consider gifting and wealth transfer strategies. Minnesota estates are still taxed at the $1M level; make sure your estate planning documents are up-to-date.

•   The fix to the AMT makes certain investments in middle- and upper-middle-income taxable portfolios more desirable and others less so.

•   There will be increased opportunities for investors to do Roth conversions. This may or may not be a good idea for you and you should consult with your advisory team before acting.

•   The bill includes extensions for some tax credits and deductions, and limitations on others.

•   While the bill extends jobless benefits for the long-term unemployed, we recommend setting aside a cash reserve. Even if your job is secure, it’s a smart place to get money when you need it.

That’s the mostly-good news. While, technically, the United States went over the fiscal cliff on January 1, by passing the bill before markets opened for the first time in 2013 on Wednesday, Congress was able to avoid further damage to investor sentiment. Needless to say, market reaction has been very positive due to the avoidance of the near-term recession risk.

But what didn’t happen is a fix to the other half of the fiscal cliff. Congress and the White House failed to address deficit reduction; the bill delays for two months $109 billion in automatic, across-the-board spending cuts.

The failure to act keeps Washington on a potentially risky fiscal-policy path. By postponing difficult decisions on the debt ceiling, benefit programs, government spending and a tax overhaul, the deal all but guarantees that Democrats and Republicans will continue to clash on major fiscal issues throughout 2013.

We believe that the political machinations will continue to create noise in the market and we caution clients about being too consumed by headline news. We are advising clients to review with their advisor team how they might potentially benefit from the tax changes, and then to remain disciplined by adhering to a well-considered strategic allocation that fits their values and long-term financial goals.

Our financial planning department, our investment team and our financial advisory teams are all available to answer your questions.  You may also ask questions via our website:


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