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

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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

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1. Expiration of Tax Cuts

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

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2. Shift in Alternative Minimum Tax

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

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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.

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5. Extenders

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

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6. Payroll Tax Cut

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

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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

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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.

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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.

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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

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What can Congress do?

Politicians disagree on certain aspects of the tax increases:

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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.

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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.

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What if Obama is elected?

• The looming deficit is a problem.

• The economy is sensitive.

• Consumer confidence is improving but still fragile. Certified

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Things to Consider…

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

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Want to Know More?

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Trusted advisors serving quality clients.

Rachel Taylor 205-345-8440 JMFCPAsrtaylor@jmf.com www.jmf.com info@jmf.com