Money IQ: The Fiscal Cliff

Money IQ
The Fiscal Cliff

The so called fiscal cliff is a series of tax increases and spending cuts that were due to come on line at the start of 2013 that were temporarily averted given a last second deal between the Republican led House of Representatives and the Democratic led Senate.

The compromise, known as the American Taxpayer Relief Act of 2012, is not the grand solution to address our nation’s surging debt issues that many had hoped for.

Rather, it is more of a temporary band aid that resolves the revenue tax elements of the fiscal cliff, but delayed addressing the tougher decisions surrounding spending cuts and raising the debt ceiling until the end of February 2013.

The Federal tax income tax rate will remain the same for everyone except those individuals with taxable income greater than $400,000 ($450,000 for married couples), which is a change that will effect less than 1 percent of Americans.

However, the actual dollar amount of taxes paid will move higher for virtually every wage earner due to the elimination of the payroll tax cuts of 2011 and 2012.

To put this in dollar terms, the Tax Policy Center estimates that households making between $100,000 and $200,000 will see an average tax increase of $1,784 in 2013.

As we move into March, all eyes shift from the cliff to the debt ceiling. Despite averting the steep cliff, the United States limit on how much debt can be issued, known as the debt ceiling along with the sequestered spending cuts and the funding for the government, all need to be addressed in the near future.

The good news is that there may finally be clarity around future tax policy, which could trigger some consumer and business spending that has been on hold during this time.

Additionally, markets do not handle uncertainty well and hopefully having some of these items addressed will allow them to continue to move in an upward direction.

There remains much work to be done in the coming months to overcome the contentious policy decisions that Washington delayed addressing.

Editor’s note: Eric Loucks has more than 30 years of experience in the financial services industry, and has been an Investment Officer with the LANB Investment Group for the past six years. Loucks grew up in Los Alamos, spent the majority of his career with Charles Schwab in San Francisco and Phoenix and returned to New Mexico six years ago.

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