Financial Planners Guessing As Fiscal Cliff Drop-Off Looms
|By Tyrel Linkhorn, The Blade, Toledo, Ohio|
She didn't need the money, and she still liked the investment. So why sell?
Worries over the so-called "fiscal cliff" and potentially higher capital gains taxes had her wondering whether she might be better off taking the tax hit now rather than sometime in the future.
"My clients, they know what my reaction's going to be,"
With all the hubbub over the fiscal cliff and the bombastic rhetoric coming from the
That has financial advisers, accountants, and tax attorneys especially busy heading into 2013.
"It makes it very difficult to plan with the uncertainty," he said. "When there's certainty everybody can deal with what they should do. Attempting to create a plan when you don't even know what the new law is going to be is quite a challenge."
The fiscal cliff is a package of tax hikes and spending cuts put together in 2011 that will automatically go into effect unless
Although most financial planners that The Blade talked to caution against knee-jerk changes to solid investment strategies guided only by tax concerns, the effects of the government careering over the cliff are very real and indiscriminate.
"There are larger implications for wealthy people, but there are implications across the board," said
The bad news for much of the middle class is that if tax rates do go up -- something both Republicans and Democrats say they don't want to happen, but as of yet have taken no action to prevent -- there's little people can do to plan for it.
Among the changes that would hit the middle class are a rollback of the Bush-era tax cuts and the end of a 2 percent cut in the payroll tax rate. For someone who earns
While that's something people should certainly be aware of, trying to find a way out of that will do no good.
"Worry about things you can control and this one is beyond the middle class' control,"
The two most common questions he's been hearing are: should I convert a regular IRA to a Roth IRA, and should I harvest capital gains this year?
So, what's his answer?
"They're not easy answers," he said. "You have a choice of perhaps paying lower rates of tax now versus deferring taxes into the future, and it's a difficult decision. My personal bias is that I prefer to defer taxes into the future because we don't know what the rates will be in the future. We know they might go up next year. We don't know for sure that they're going up."
For investors and higher-wealth individuals, there are plenty more questions without good answers.
The rate for capital gains and dividends, currently set at 15 percent, are both slated to go up as part of the fiscal cliff package. That's why
But as he told her, there is no guarantee of where the rates will end up -- or even that they will go up. To that end, he compares the fiscal cliff deliberations to the
"I refuse to make massive changes in my personal portfolio or my client's portfolio based on what these guys might or might not do in
"We can always pay no taxes by making no money,"
Instead, investors should do their homework, crunch the numbers, and talk to their advisers to make decisions that are educated, not panicked.
However, financial advisers do say investors who are considering selling stock holdings anyway might want to do it now to get the sure rate rather than whatever
But none of that advice is revolutionary.
"You should have been doing these anyway whether the fiscal cliff occurs or not,"
Still, the current year's tax rules could provide some opportunities for people.
With expectations that both the estate tax and gift tax exemptions will drop considerably next year, 2012 presents a good time to pass on a legacy to children or grandchildren.
"This is a great year to take advantage of a really high gift exemption, which is
The exemption could also present an opportunity for someone to pass on a business. Ms. Scroggs said she's seeing many clients looking into that possibility.
Of course, no one outside of
"Right now I'm not overly optimistic that we're going to get a full solution," said
One of his biggest concerns is over the alternative minimum tax.
The alternative minimum tax was passed years ago to ensure wealthy people aren't able to exploit loopholes and deductions to escape taxes altogether. But it isn't indexed for inflation, so
"That could mean thousands of dollars of additional tax for people whose income is no different than it's been for the last couple of years,"
But that's something else completely out of taxpayers hands.
So perhaps the best advice is the same advice financial advisers would give in any year. Do a written financial analysis. Take stock of investment accounts, evaluate retirement plans, look at business prospects for the coming year, consider estate planning and insurance.
"The average person is probably not able to control what's going to happen. Is their payroll going to get further taxed, are their rates going to go up? There's not much they can do about that," said
(c)2012 The Blade (Toledo, Ohio)
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