As the end of the year nears, attention turns to the looming "fiscal cliff," in which automatic spending cuts and tax increases will occur if the President and Congress fail to broker a deal by the end of the year.
No doubt agents will need to be in a position to act quickly. With the many people lacking an understanding of how the situation could affect them, agents can and should be meeting with clients to update their personal data and to crystalize their objectives. That way, when the tax rules are set, agents can provide a plan of attack to their clients.
For middle-class and low-income Americans, income taxes will most likely not increase in a meaningful way. The most significant tax increase for middle-class workers would be an expiration of the payroll tax holiday at the end of this year, which would affect virtually everyone's take–home pay. For a person earning $40,000 annually, it would mean his payroll tax would increase $800 in 2013.
Still, resolving the $1-trillion annual deficit means budget negotiations may result in reducing some federal government services—a change that may affect all facets of the population.
For higher–earners, agents should take advantage of the current estate planning rules and consider the current gifting limits. And for individuals sitting on assets or portfolios with large unrealized capital gains, they should consider realizing the gains to take advantage of the current capital gains rate.
One key issue is whether a number of business owners will look to sell their businesses to lower their potential tax bill. Most likely, if they were concerned about the pending tax cliff, they would have identified a possible buyer for their business. It will be interesting to see if the fourth quarter of this year will see more merger and acquisition activity. Clearly some of the recent decline in the stock market can be attributed to tax harvesting—that is, people looking to realize some of their gains in the stock market.
Dave Evans is a certified financial planner and an IA l-h contributing editor.