Tax adage: Surviving the ‘fiscal cliff’
Wednesday, Dec 5, 2012
In 2011, while facing a downgrade of the sterling U.S. credit rating, Congress passed a bill called the Budget Control Act of 2011. In an effort to avert the crisis and reduce the deficit (averting future crises), this bill raised the debt ceiling and reduced spending. As another part of this bill, if Congress fails to pass a deficit reducing bill, beginning in 2013 there will be across the board mandatory spending cuts. So whether it is by across the board cuts or by passing a deficit reducing bill – some kinds of cuts are coming. These spending cuts, combined with the three following facts:
• The Bush-era tax cuts and certain deductions are set to expire;
• The Alternative Minimum Tax (AMT) could affect 34 million taxpayers – many for the first time (resulting in estimated $2500-$3700 for average family) – if not indexed for inflation and;
• The Affordable Care Act Costs are coming our way.
And there you have it – the fiscal cliff. Some people paying more in taxes coupled with less governmental dollars in circulation decreases the amount citizens have available to put into the economy, and if left unchecked, this will shrink our economy. Not by much – but the Congressional Budget Office says it’s enough to cause another recession.
Contact your senator or representative. They may not agree with the other side of the aisle on everything, but they need to do something. You can find out how to contact them at http://www.usa.gov/Contact/Elected.shtml. If our lawmakers can’t get it together, how can you come out of all of this unscathed or at least minimally scathed? Focus on doing things that reduce your tax.
Here’s our advice:
• Find out how the new health care law will affect you specifically. There are tax credits for employers and maybe upcoming health care subsidy adjustments for individuals that could help you to offset anything that increases your tax.
• Max out on contributions to tax-deferred retirement savings plans. You can contribute up to $17,000 (or $22,500 if you’re 50 or older) to your 401(k) or other employer-based plan for 2012. For many who don’t have tax deferred plans - put up to $5,000 ($6,000 if you’re 50 or older) in an IRA, and you have until April 15, 2013, to do so.
• At tax time, discuss with your tax adviser to see if you need to increase federal withholding or estimated tax payments going forward.
• If you have more than $1 million in assets, talk to an estate planning lawyer about transferring wealth to your family members now to take advantage of the current exemption.
A bright spot for taxpayers in all of the confusion is the new IRS regulation on tax return preparers. Also known as the return preparer initiative, currently all tax return preparers must have a Preparer Tax Identification Number (PTIN) and satisfy continuing education requirements. By the end of 2013, all paid tax preparers must pass a competency test. The IRS is doing this to encourage and assist taxpayers in finding the best most reputable tax preparers. They are even setting up an online database to help you find a competent preparer near you.
The fiscal cliff is serious. Whether Congress can resolve all the issues remains to be seen, but you can be prepared. For further help and to get the best advice possible, contact a tax adviser to discuss your specific situation.
H&R Block provides bookkeeping, payroll, tax preparation and advice. Upper Cumberland offices and agents include Nella Lohorn, EA, Sparta; Teresa Tompkins, franchisee, Jamestown; Linda Tower, franchisee, Livingston; Dolores West, EA, Celina; Lee Smith, EA, Carthage, Smithville, McMinnville; Betty Williams, Crossville; Roger Tompkins, franchisee, Monterey; Jerry Joyner, EA, Cookeville; and Shasta Yankee, EA, Gainesboro. For more information, visit www.hrblock.com.