WHAT IS THE FISCAL CLIFF?

By in Economics, Taxes | 14 comments

SAVE MONEY WITH SMART TAX PLANNING

Part of wealth accumulation is understanding the tax system. As a teen, my dad started teaching me the ways of minimizing taxes with one’s own business. If you have your own business, certain expenses are tax deductible and can save money on your annual tax bill. It’s crucial to pay the government their due, just no more. Keep up with the tax law and potential deductions to have more funds for saving and investing.

THE FISCAL CLIFF IS LOOMING

Talk of the fiscal cliff is everywhere. What does the fiscal cliff have with building wealth? The short answer, a lot.

According to the NY Times, ” The term refers to more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after Jan. 1 — for fiscal year 2013 alone — unless President Obama and Congress reach an alternative deficit-reduction deal.”

In short, unless the congress gets to work and extends or changes the tax law, the tax cuts put into place under the Bush administration are gone. Here’s how your taxes will look if nothing is done:

 

fiscal cliff tax changes

FISCAL CLIFF-HIGHER TAX RATES IN 2013

If the government does nothing, then most Americans will be subject to higher taxes. If you have a job, federal income taxes will go up for almost all. For all you dividend investors out there, hunting for yield, dividends will be taxed at ordinary income rates. If the past is any indicator, it’s likely some of these tax increases will be tempered, so don’t panic just yet. In spite of future tax uncertainty, consider these strategies to avoid a potential tax lashing in 2013.

5 TAX PLANNING TIPS

 

1. SELL YOUR WINNERS

Take capital gains now, while capital gains tax rates are lower.

2. SAVE CAPITAL LOSSES FOR LATER

They will be worth more when tax rates are higher. If you plan to sell a stock or mutual fund with a loss, wait until next year instead of this year.

3. DIVERT FUTURE INCOME TO PRESENT

If you own your own business or can control bonuses, take the money in 2012 rather than 2013, and save a few points in taxes due. If your older and planning a distribution from a retirement account, take it this year instead of next. (If you’re over 70 1/2, you’ll still have to take your required minimum distribution in 2013).

4. DELAY TAX DEDUCTIONS INTO 2013

You might want to make your annual charitable tax deductions next year, when they’ll be more valuable. Consider pushing any tax deductible payments into next year if possible.

5. SAVE TAXES BY CONTRIBUTING TO TAX ADVANTAGED RETIREMENT ACCOUNTS

Contribute as much as possible to your workplace 401(K), 403(B), or ROTH IRA. The tax savings will be worth even more as tax rates rise.

WEALTH BUILDING

Building long term wealth requires attention to spending, saving, investing and tax planning. I understand that at times these issues can be overwhelming. The cost of avoiding thinking about taxes results in paying more to the government. Pay only the amount of taxes that are due, and take advantage of legal methods to reduce your tax burden.

Can’t Get Enough Tax Resources?

What are your tax planning tips and stories?

image credit; Fidelity.com

 

    14 Comments

  1. Very nicely explained Barb! A lot of talk about fiscal cliff in the media but very few have bothered to explain how it impacts us. Great job!

    Moneycone

    November 19, 2012

  2. Great explanation of the Cliff and some good tips of what to do. The large majority of our investing is in retirement accounts, so selling/holding really does not apply to this. Owning our own business though, you better believe we’ll be taking as much of the income we can get this year as opposed to next year and being mindful of what deductions to take this year.

    John S @ Frugal Rules

    November 19, 2012

  3. @Moneycone-Happy to help clarify.
    @John-It’s counter intuitive to take income this year and delay deductions into next. But this year is unlike many past years. Sounds like you’re on the right path.

    Barbara Friedberg

    November 19, 2012

  4. A little planning goes a long way to dealing with this issue. Too many people think there is nothing they can do. Our tax system relies on us to either be proactive or suffer the consequences.

    krantcents

    November 19, 2012

  5. Great info, Barb. Quick question: do you know if the income amounts are total, adjusted gross, or taxable?

    Julie @ The Family CEO

    November 19, 2012

  6. @Krantc-ABsolultely, so well put “Our tax system relies on us to either be proactive or suffer the consequences”
    @Julie- I would assume the figures are taxable, but for a definitive answer I’d speak with a tax professional and/or check out irs.gov.

    Barb

    November 19, 2012

  7. I agree. Very clear post Barb. I have to say there hasn’t been as much talk about this in Canada as there has been for you guys. Makes me wonder.

    Miss T @ Prairie Eco-Thrifter

    November 20, 2012

  8. HI Miss T, Your tax structure is quite a bit different than ours. It is my understanding that Canadians have higher taxes and the government offers more retirement and health care assistance. There are always trade offs :)

    Barbara Friedberg

    November 20, 2012

  9. Sounds like a fiscal mountain rather than a cliff!

    However the markets have a way of pre-empting things. So prices will be lower for winning companies up until 2013 just because more people are dumping them and taking a profit. On the other hand the price after Jan 1 will reflect any new tax regime. I think that while efficient tax planning is a given, it is more important to see the fundamentals of investment – and even perhaps look at instruments overseas.

    Just my $0.02!

    John@MoneyPrinciple

    November 20, 2012

  10. @John, I’d say your remarks are worth at least a buck. Very sound advice. And I echo your sentiment to remain diversified internationally. After all, no one knows what asset classes will be next years winners.

    Barb

    November 20, 2012

  11. I am getting very tired of hearing about the fiscal cliff. Theirs other economic issues more important than this. It gets a little silly when you think about it.

    Financial Directory

    November 22, 2012

  12. @financial-AS someone who has lived through a variety of tax rates, I agree!!! Additionally, the USA has very low tax rates compared with Canada and many European countries.

    Barb

    November 22, 2012

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