Last year, it was over Social Security taxes. You might recall that not only did we have a cliffhanger at the end of the year, but Congress initially extended the two-percent tax break for only two months, creating a second cliffhanger at the end of February.
Fiscal cliffs are not a joke. They hurt ordinary people:
Because of tardy tax legislation, the IRS is once-again likely to delay the start of the filing season. It takes time to reprogram the system. Later-filed tax returns mean even later tax refunds. Which means taxpayers can’t spend those tax refunds and stimulate the economy until later.
What if a small business is on the verge of hiring a worker? If an entrepreneur doesn’t know what the tax rates will be, it’s impossible to make a budget. Should a businessperson hire the worker and risk coming up short when it’s time to meet payroll? What sensible entrepreneur wants to take that chance?
Not knowing what tax rate to expect is called tax turbulence. It can be a major drain on the economy. Many economists believe it also hurts the stock market.
Of course, this, too, shall pass. My advice is to Keep Calm and Carry On. Unless you have a very specific situation or have a fairly high income, relax, and take the long-term view.
Meanwhile, here are some specific end-of-year things you should consider:
Next year, health care expenses are only deductible to the extent they exceed ten percent of your adjusted gross income (rather than 7-1/2 percent this year). The rule will remain 7-1/2 percent for those 65 and over. So, if you have a lot of health expenses, try shifting some expenses into 2012 instead of 2013. Refill prescriptions, visit the dentist, etc.
If this year finds you in a lower tax bracket than usual and you can afford it, consider converting your IRA to a Roth IRA before January 1st. It’s always a bit of a guessing game as to when is the best time to make the conversion and pay the tax. Be sure to speak with a professional before you proceed.
Ordinarily, tax planners suggest that you defer income to the next year and prepay expenses in the current year. This allows you to delay paying some taxes for a year. But if tax rates really do go up, this strategy could backfire. Still, unless your income is over $200,000, it’s probably a safe bet to go with the usual strategy: Delay income and accelerate deductions.
If you are in the process of buying or selling real estate or other assets, by all means, listen to and cooperate with the professionals helping you. If the deal needs to be done in 2012, git‘er done! The same goes for estate planning.
Is there any way we can prevent Congress from creating these fiscal cliffs in the future?
Congress often waits until the 11th hour to pass tax legislation in order to convince constituents that “we-tried-as-hard-as-we-could-but-those-wicked-folks-in-the-other-party….” Maybe this is good politics, but it’s terrible economics.
We need to remind Congress what we learned in high school. Our government is a government of compromises. Our system is specifically designed to resist the changes of would-be tyrants. But with a model like ours, it’s vital for legislators to work together. It’s their job: Conduct the peoples’ business—not damage the economy playing politics.
We need to remove the incentives for Congressmen to be dogmatic and uncivil. Let’s inform our individual legislators that we are watching them, and that like 90 percent of other Americans, we aren’t fond of fiscal cliffs.
