Download - Understanding the Fiscal Cliff

The Fiscal Cliff

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Presented by Rachel Taylor, CPA

1. Expiration of particular tax cuts2. Shifts in alternative minimum tax3. Increased Medicare taxes4. New spending cuts5. Tax extenders6. Expiration of

payroll tax cut


The Fiscal Cliff Defined:

•Bush-Era tax cuts (2001/2003)•Reduced tax rates•Reduced taxes on long term capital gains•Reduced taxes on qualified dividends•Increased child tax credit

•Obama-Era tax cuts (2009)•Expanded earned income credit•Expanded child tax credit•New American Opportunity Credit for tuition


1. Expiration of Tax Cuts

• The AMT “patch” is scheduled to expire.• The reduced AMT exemption will cause more people to pay AMT.


2. Shift in Alternative Minimum Tax

• New taxes on high income taxpayers (earning over $250,000)


3. Increased Medicare Taxes

• An additional .09% Medicare tax on earnings above $250,000.

• An additional 3.8% Medicare tax on capital gains, dividends, and interest income over certain thresholds.

• Provisions from the Budget Control Act of 2011 are slated to go into effect.

• Includes military and Medicare budgets. Certified

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4. New Spending Cuts

• Other various short-term tax provisions that Congress regularly extends.

• Includes individual and business credits.


5. Extenders

• The social security tax rate cut will expire.• It was intended to be short term.


6. Payroll Tax Cut

• Forces a decrease in the deficit – by half a trillion dollars ($500,000,000,000)• Future tax breaks? Certified


Benefits to Fiscal Cliff?

• Taxes will rise by $500 billion in 2013. Almost 90% of taxpayers will see taxes rise.

• Middle income taxpayers will pay $2,000 more.

• High income taxpayers (top 1%) will pay $120,000 more.

• Low income taxpayers (less than $20,113/year) will pay $412 more Certified


Effect of the Fiscal Cliff on Taxes

• Job loss estimated at 2.14 million.

• Decrease in gross domestic product could lead to another recession.

• Decreased hiring and spending as a result of uncertainty.

• Loss of bonus depreciation and decreased Section 179 expense.


Effect of the Fiscal Cliff on Businesses

• It depends on what happens, and how long it takes. • Commercial real estate could suffer sooner than residential.


Effect of the Fiscal Cliff on Real Estate Markets

• Option 1: Nothing.• Option 2: Congress can act during the “lame duck” session. • Option 3: Congress can act after the new year. Certified


What can Congress do?

Politicians disagree on certain aspects of the tax increases:


What is Likely to Happen?

• The Bush-era tax cuts for high income taxpayers.

• The expanded credits including earned income credit and child tax credit.

• The increased tax rates on capital gains and dividends.

• If Republicans have good representation in Congress, it is likely that no action will be taken during the lame duck session.

• It is likely that Republicans want to continue tax breaks, including those for the wealthiest households.


What if Romney is elected?

• Partisanship will likely continue especially if Republicans make gains in Congress.

• The Democrats have asked upper income families (earning more than $250,000) to pay more by way of increased rates.


What if Obama is elected?

• The looming deficit is a problem.

• The economy is sensitive.

• Consumer confidence is improving but still fragile. Certified


Things to Consider…

Read the analysis from the Tax Policy Center entitled “Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?”


Want to Know More?

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Trusted advisors serving quality clients.

Rachel Taylor 205-345-8440 [email protected] www.jmf.com [email protected]

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