Wednesday, October 24, 2012

Fiscal Cliff Diving


“A committee is a group of people who individually can do nothing, but who, as a group, can meet and decide that nothing can be done.”
-      Fred Allen, comedian

Got a problem?  Form a committee to study it.  The committee will study the problem for as long as it takes.  The “take” usually involves large sums of money and when the committee is in Wash D.C., the money involved is yours and mine.

You’ve probably heard plenty of press about the coming “fiscal cliff” that the U.S. is marching towards on December 31, 2012.  The problem is a “two-fer”, meaning there are two parts:

  1. Part One is the result of our leaders kicking the can down the road in December, 2010 to wiggle out of their inability to come to grips with the expiring tax policies of the previous administration.  A deal was cut to extend most of those policies for two more years to December 31, 2012 (but see below for items that may affect 2012 income taxes).

  1. Part Two is the result of our leaders kicking the can down the road in August, 2011 to wiggle out of their inability to come to grips with the expiring U.S. government debt ceiling.  A deal was cut to force “severe” budget cuts in a broad swath of government spending if a Joint Congressional Committee couldn’t agree on what those cuts should be.  The Committee was unable to agree on the cuts and here we are arriving at the date on which the mandatory budget cuts are to become effective – January 1, 2013.

  1. BONUS! More provisions of the Patient Protection and Affordable Care Act - aka “Obamacare” – go into effect January 1, 2013.  We’ll provide more details about these provisions in a special commentary after Election Day.

I don’t know about you, but I’m detecting a pattern here.  It’s almost a perfect storm, a financial Katrina.  You will continue to hear much hand-wringing and demagoguery from Wash D.C. about these issues because it is election season.

What You Need to Know Now
Most of these issues will not be dealt with until 2013 nor is earlier action necessary.  However, some of the income tax items on the list may – if not dealt with before year end 2012 – affect taxes due for 2012.  The following two are probably of the most importance to you:

  1. Alternative Minimum Tax (AMT) Exemption – The AMT is a separate tax system that imposes a flat tax rate on certain taxpayers.  The law contains an exemption amount (sometimes called a “patch”) which offsets the AMT for many taxpayers.  However, the exemption has not been adjusted for inflation so unless it is increased by Congress, as many as 27 million additional U.S. households will be subject to the AMT in 2012.  The AMT exemption was increased for tax year 2011 as part of the 2010 deal, but an increase for 2012 was not included.  If you are subject to the AMT in 2012, your total income tax bill will be higher than otherwise.

  1. Itemized Deduction for State and Local Sales Tax – Most states impose an income tax on their residents (only seven states – including Washington - do not).  State income taxes are allowed as an itemized deduction but an itemized deduction for sales tax paid has been at the whim of Congress.  A deduction for sales tax paid in 2011 was included as part of the 2010 deal, but not in subsequent years including 2012.  If you are not able to take a deduction for state sales taxes in 2012, your total income tax bill will be higher than otherwise.

I have to think that our leaders aren’t so polarized that they can’t get something done about these issues before year end.  But they might not.

What You Can Do About It
If you are working with a CPA or other tax professional, you should contact them to get their input on how these items might affect your taxes for 2012.  We can provide a CPA referral if you like.

We intend this information to be informative, not alarmist.  Nothing will be done in Wash D.C. on these issues until after the election.  The 2010 tax deal was signed into law December 17, 2010 and we expect anything done this year will follow a similar timeline.

I have to think that our leaders will take the pragmatic approach and solve these issues before year end.  Let’s hope they do so.

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