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The Fiscal Cliff Deal – (or Half Deal)

Non-stop fiscal cliff negotiations (and media coverage) at year-end finally resulted in a last minute fiscal package by Congress that adds some certainty for investors on tax rates in the coming year.  Spending issues were not addressed, but instead postponed 60 days. We can look forward to another round of Congressional wrangling on spending cuts, potential changes to entitlement programs, and corporate tax reform in the coming weeks.

But for now lets recap the key impacts of the fiscal cliff deal for investors:

  • The payroll tax holiday expires, shrinking paychecks by 2% in the coming year, a likely drag on consumer spending in 2013. A one year extension of unemployment benefits will partially offset the economic impact.
  • Permanent extension of Bush-era tax cuts for individuals with incomes up to $400,000 and couples with incomes of up to $450,000.  Pre-Bush era tax rates of 39.6% were reinstated for incomes above the $400,000 and $450,000 levels.
  • Permanent maximum 15% tax rate on dividend income and long-term capital gains for individuals and couples up to the higher income levels referenced above, with a 20% tax rate for both dividends and capital gains for those with higher incomes.
  • A patch for the Alternative Minimum Tax (AMT) along with indexing the AMT for inflation going forward.
  • Estate tax exemptions remain in place for net worth levels up to $5 million, with tax rates increasing to 40% (from 35%) for net worth levels above $5 million.

Overall, there is more certainty on tax rates for investors in the coming year but larger fiscal spending policies and issues still need to be addressed.  Until then, we expect business and consumer spending to remain cautious. Our economic outlook for the 1st quarter also remains cautious, so we will more than likely hold steady with our current portfolio risk which is 8-20% less aggressive than we could be.

Please call us with any questions or concerns. Feel free to forward this to others who might be interested.

The All Star Team

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