The term "fiscal cliff" is being bantered around more and more these days, so much perhaps that many of us have become numb to the idea.
The term refers to both the simultaneous expiration of the current lower income tax rates (Bush tax cuts) and the payroll tax “holiday” that has been in place for two years. It also includes the automatic federal government spending “sequestrations” that were put in place as part of the debt ceiling compromise of 2011. The sequestrations could theoretically reduce federal government spending by about $50 billion in 2013.
The combination of these fiscal changes are feared to present a real risk to our economy, a risk that could push the U.S. over the “fiscal” cliff into renewed recession.
Unfortunately, when we become numb to something we tend to ignore it, and while the stock market certainly seems to be taking this issue in stride, there are some serious financial planning issues associated with the pending policy changes that could have a serious impact on middle class families.
One big issue flying under the radar involves estate taxes. I personally believe that most of the fiscal cliff problems with taxes will be solved. Despite the president’s fair share rhetoric, raising income taxes in a weak growth environment will be difficult to justify, and involves considerable political risk.
The estate tax however, is much more manageable politically and could be extremely profitable for the government. The changes in store for the estate tax are simply huge with tax rules reverting back to 2001 levels.
What this means is in 2012 both the estate tax and lifetime gift tax exemption are $5,120,000 per person and $10,240,000 per couple, with a 35 percent top tax rate. But beginning in 2013, the exemptions will drop to $1 million per person ($2 million per couple) and have an effective top tax rate of 55 percent.
Congressional Budget Office estimates suggest the tax revenues resulting from these changes could be as high as $500 billion over the next 10 years, and as we all know, the Feds desperately need the money, which is why I believe the estate tax could be the ideal compromise issue for the Republicans. Expect estate taxes to go up.
This issue could become particularly problematic for our local farmers. With agricultural land values at all-time highs (as high as $9,500 an acre) it doesn’t take a big farm to put an estate into tax trouble.
Fortunately there still are some attractive planning tools available and a little bit of time. Estate planning can be complicated, so if you’re concerned about these changes get advice. This is an area where a good financial adviser and good estate planning attorney can bring a lot of value.