Year-End “Fiscal Cliff” Update


As the year comes to a close today, we wanted to provide you with a quick update on the status of the so-called "Fiscal Cliff".  Apparently, yesterday the Democrats made quite a few key concessions signaling hope that a deal will be made very shortly. 

We have previously detailed out the possible tax implications of the "Fiscal Cliff" in our blog post here.  Below is a list of the reported key concessions and issues from the  proposal made by the Democrats yesterday:

  • Increased income threshold for tax rate increases to $450,000 for couples from $250,000.
  • Increased capital gains and dividend tax rate to 20% for couples with income over $250,000, and reducing some allowable itemized deductions.
  • Retention of the current $5 million estate tax exemption and 35% estate tax rate.
  • Permanent Alternative Minimum Tax "protection for middle-class households".

There seems to be a lot of confusion as to the term "Fiscal Cliff" – this term was coined by Fed Chairman Ben Bernanke when testifying to Congress early this year.  It refers to the combination of legally mandated spending cuts and tax increases that will begin January 1, 2013 absent legislative action by lawmakers.

The spending cuts are estimated to be about .25% of current spending levels, while the tax revenue increases are estimated to be about 19.63% from current levels. 

The most immediate impact of these potential tax increases is the increase in withholding from paychecks that employers would be responsible to begin on January 1st, for both income tax rates, and increased social security tax.  As of right now, there does not appear to be any clarity or instruction for employers as to how to implement the increased withholding.

We are tracking the progress of this issue very closely, and will communicate with you when there is a resolution to this issue, along with our own analysis of its potential impact on our clients.

In the meantime, if you have any questions about this, or any other issue, please do not hesitate to contact us. 


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