December 21st, 2012 is here and the world did not end. (I will eat crow if something does happen before midnight.) While everyone’s focus is on whatever garbage the media is discussing on the news now, there are some very real changes coming to impact you one way or another on Jan 1st.
The good news is, people are aware of the fiscal cliff, the agreed upon tax increases and spending cuts Democrats and Republicans agreed on earlier in the year in case they could not get a budget done. The bad news is… politicians are so stuck in their ways, particularly the democrats who feel they need to stick it to the wealthy people and increase their taxes. The reality is, even if the taxes on the top 2% were raised to 100%, ie, all of their earnings would go to the government, it would only run the government for 91 days. The tax increases the president and democratic senators are making a big fuss about are only going to run the government for a few days. The real issue is spending. Here is another one of those factoids with which to impress your coworkers, in 1913, only 1% of the population paid taxes, and the top tax rate was 7%.
I digress. The focus on the cliff and whether we have a deal or not will mostly focus on the amount of government cuts and the tax increases, in regards to the extension of the Bush tax cuts and for whom. Those will focus primarily on:
1. The top Ordinary Income Tax Rate – Going up from 35% to 39.6%
2. Increase in Long Term Capital Gains – Going up from 15% to 20%
3. Increase in Short Term Capital Gains – Going up from 35% to 39.6%
4. Increase in Qualified Dividend Tax Rate – Going up from the now 5%/15% up to 39.6%
Assuming we do not get a deal, taxes rise for everyone. With the deal, the question mark is at what income level those tax rates rise. The bigger problem is the NEW taxes coming in 2013, not related to the Fiscal Cliff arguments. Those new taxes are…
1. Investment Health Care Surtax (Used to pay for Obamacare) – 3.8%
2. Medicare Wage Surtax – 0.9%
3. Limits on Itemized Deductions.
While the new taxes are primarily to those earning $200,000 and above, they will impact business owners and many many many people in New Jersey. We are the most heavily taxed state to begin with.
Then, there are tax cuts that are going away for everyone. For one, is the Payroll Tax Holiday enacted two years ago that put about $20 a week to people’s paychecks. That is coming to an end this year.
The silent killer, no pun intended, is the Estate Tax, better known as the Death Tax. Without changes, the Estate tax exemption is coming down to $1 million, and the tax rate is going up to 55%, that is from the approximate $5.12 million it is today with a tax rate of 35%
What does this mean? For one, the death tax, which most people did not need to worry about, now will become a massive issue for the middle class if it is not fixed. Not familiar with how it works? Here it is simplified.
When you die, besides paying any income taxes, gift taxes, generation skipping taxes, property taxes, sales taxes, and any other money owed to the IRS, all of your assets that do not have a designated beneficiary are added together and get assigned a $ value. Then, anything over a certain amount, gets taxed yet again.
So…. when you die, you get to pass on to your family $1 mil worth of assets, and the rest of the money the government will take 55%, and pass 45% to your loved ones or charities.
All in all, I see 2013 as a very challenging year. We already have a slowing economy, which was anemic to begin with. We have massive uncertainty because politicians make a stink about small issues while they avoid the challenging ones, we have massive financial problems in the United States with the entitlement programs such as Social Security and Medicare, and we have even bigger problems with the massive spending on everything else. The only reason we are able to survive is because the rest of the world was having more challenging issues, however that will not be forever.
Here is what we know, taxes have to go up anyway, the question is how and whom. Will everyone pay a fair percentage, or will the upper income earners pay even more than they do today? Government spending must go down before the whole ponzi scheme explodes, the issue is when it will happen, and if ever will the spending go down. There are over 21 million people either unemployed, underemployed or out of the workforce. Unemployment numbers posted by the government are a complete scam as they do not count people who ran out of unemployment benefits or only have a part time job. When the year ends, so will the extended unemployment insurance, and such, yet more people will not be reflected on the official unemployment numbers and make the numbers look better than they are.
I see a 50% chance us going into a recession next year (and it is due anyhow), with the number going up to 75% if the fiscal cliff happens. (which in the long term is a good thing, think of it as pulling off the band aid and taking the pain at once or stretching it out over a long period of time.)
Bottom line, there will be pain, but as they say… The 7 P’s. Proper Prior Planning Prevents Piss Poor Performance. Lets talk today about how we can minimize the uncertainty in your financial plan.
Maks Financial Services is an independent financial planning and advisory practice in Princeton, NJ.
Disclosure: Consult your tax professional in regards to your individual tax situation. Nothing in the post above should be taken as Tax Advice.
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