2Wednesday, October 31, 2012
Components of a Fiscal Cliff
By Jay Brooks
You cannot turn on nancial or political TV nowadays without hearingthe phrase
All of thetalking heads are running aroundscreaming that we are headed for a meltdown unless action is taken.
s strange to me that no one ever outlines what exactly is driving usover the cliff. Today we are going toexamine what the key componentsare of this economic disaster and howeach political party feels towards theissues. By the way, were you awarethat it was a South Carolina native,Ben Bernanke, that coined the phrase
Bush tax cuts
—At roughly $200billion in 2013, it’s the largestcomponent of the scal cliff. If theyexpire, the top ordinary income-taxrate will rise to 39.6%, from 35%,
ital gains ratewill increase to 20%, from 15%.Dividends, currently taxed at 15%, willbe treated as ordinary income.
—The Super Committee’s failed attempt to comeup with a viable plan to reducethe decit triggered $1.2 trillion inautomatic spending cuts over the nextnine years. It impacts two key areas:Defense spending and discretionaryspending—with exemptions on SocialSecurity and Medicaid.
—The alternative minimumtax is an archaic tax law aimed atthe nation’s highest earners withspecial rules and rates for deductions.Enacted as part of the Tax Reform Actof 1969, the AMT has been “patched”to offset ination.
ven with the patch, its reach hasexpanded from 155 wealthy familiesto 4 million taxpayers, includingthe middle class. Without newexemptions, taxpayers will pony up anadditional $94 billion.
Enacted in February 2009 aspart of the American Recoveryand Reinvestment Act, theseunemployment benets wereextended to an unprecedented 99weeks. If the extension expires, thebenets will roll back to 27 weeks,representing an estimated $140billion.
—TheBudget Control Act of 2011 placed2% growth limits on discretionaryspending through 2021, excludingthe Afghanistan war and designatedemergencies. The cap holdsappropriations for 2012 and 2013below its 2011 level. The estimateddrag on the economy will be roughly$85 billion next year.
Health-care law taxes
—Under the Affordable Care Act, America’s topearners get the biggest bill, includinga 3.8% tax on investment income.When coupled with a new excise taxon medical equipment, the economicimpact totals $21 billion in 2013 andmoves higher each year thereafter.
The “doc fx”
—A deferral of cutsto physician reimbursement under Medicare that dates back to theBalanced Budget Act of 1997.Renewed annually since inception, itis expected to detract $20 billion from2013 GDP if re-upped.
Social Security payroll tax
—A 2%reduction in the amount employeeshave taken out of their paycheck for Social Security benets. Introducedunder the Tax Relief, UnemploymentInsurance Reauthorization and JobCreation Act of 2010, it was extendedalong with unemployment benets,but may expire on its own.
—The estate-tax exemptionwill fall to $1 million from $5 millionfor any estate not left to a spouse or a recognized charitable organization.Estates above the exemption levelwill be taxed at 35%. With more than50,000 estates expected to take a$40 billion hit, it’s an important issuefor nancial advisors who offer estateplanning.
—Various taxcredits related to research andexperimentation, local sales taxes,foreign investments and alcohol fuelthat are set to expire.This perfect storm of tax increasesand budget cuts is driving our economy crazy with uncertainty.Businesses and individuals have noidea what their tax rates are goingto be and whether new healthcarecosts are going to be forced uponthem. What we do know is that youthe investor can still create somepeace of mind with well thought outplans. Please feel free to contact usto discuss your concerns.
Securities offered through HighStreet Securities, Inc. (Member FINRA/SIPC) 1251 Lakeside Road,Suite B, Hot Springs, AR 71901 (800)756-0920
and Advisory Servicesoffered through Brooks FinancialServices, 124 Laurens Street, NW, Aiken, SC 29801, phone number (803) 648-1008,
a RegisteredInvestment Advisory Firm. Jay Brooks,SC Insurance License #500027.Brooks Financial does not give legalor accounting advice.
Cliff Component Fiscal Impact Democratic View Republican View
Bush tax cuts* $305
billion Expire ExtendThe sequester $160
billion Repeal Repeal AMT patch $225
billion Extend ExtendUnemployment benefits $30
billion Expire ExpireDiscretionary spending cap $170billion Expire ExtendHealth-carelawtaxes $50
billion Implement RepealThe“doc-fix” $30
billion Extend ExtendSocial Security payroll tax $120
billion Expire ExpireEstate tax* $35
billion Extend ExpireTax “extenders” $60
billion Extend Expire
Total fiscal hit $1.2 trillion% of GDP 6.9%
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