Patrick Talcott, Senior Vice President with People's United Wealth Management, joins us to talk about the fiscal cliff and what it means for your finances.
Q. Alright, everybody is talking about it, but in simple terms, what is the 'fiscal cliff'?
A. In a nutshell, the fiscal cliff is a combination of tax increases and government spending cuts that will kick in automatically in January if the White House and the Republicans in Congress can't reach an agreement before the end of the year.
Q. What are some of the spending cuts we should expect to see?
A. We're looking at $1.2 Trillion in broad based spending cuts over the next several years with roughly $109 Billion in 2013. These cuts are split evenly between two categories - Defense Spending and Non-Defense Spending. Non-Defense Spending would include cuts to Medicare providers such as hospitals as well as cuts to education, and many other programs.
Q. What are some of the tax increases that might affect individual taxpayers?
A. Similar to the spending cuts, we would be looking at across the board tax increases as what we call the Bush Tax Cuts would expire. This means higher income taxes with the lowest bracket going from 10% to 15% and the highest going from 35% to 39.6%. It also means higher taxes on your investments as both capital gain and dividend taxes would increase substantially. The 2% reduction in social security payroll tax we've enjoyed over the last two years will go away and if you're looking for a double whammy, individuals with a net worth in the $1-5 million range should be very concerned as the estate and gift tax limits are set to lower from $5.12 million to $1 million with the top tax rates increasing from 35% to 55%.
Q. How did we get to this point?
A. In November of last year, there were a lot of headlines as the US had reached our borrowing limit. Our politicians agreed to raise the limit, but only if serious discussions would take place to reduce the federal deficit. What was called the Super Committee was formed and as motivation to work together, if a deal could not be reached $1.2 Trillion in broad based spending cuts would automatically trigger. Unfortunately, the parties could not come to an agreement so here we are today talking about the fiscal cliff.
Q. Do you have any advice for people like me looking to avoid these tax increases?
A. Everyone should expect their paycheck to be smaller in January. Just remember to take full advantage of pre-tax savings vehicles such as you workforce retirement plan, IRA accounts or a health savings account.
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