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Friday Financial Five –December 28th , 2012

Friday, December 28, 2012


Going over the cliff
Ben Bernanke brought the term “fiscal cliff” to the mainstream in February of this year. After 10 months, it’s amazing to think that Congress has been unable to put in place even a temporary or partial solution. As it stands, the Tax Policy Center estimates 88 percent of the country will see an increase in taxes, with the average tax increase equaling $3,400. The House of Representatives will meet this Sunday, so thank your Congressperson for putting in time on a weekend. It’s not like they knew this was coming.

Real estate continues humming along

In local news not directly tied to the fiscal cliff, Rhode Island saw a huge increase in the number of single family homes sold in November according to the RI Association of Realtors. This hasn’t translated to giant increases in either the median or the average sale price. Certain pockets locally and nationally will end 2012 with a yearly gain, but the housing market needs continued assistance to continue its roll. That means low rates and beneficial mortgage interest and capital gains rules.

AMT Patch

Going back to fiscal cliff coverage, the Alternative Minimum Tax is seldom mentioned because it’s assumed this is one area that will most certainly get addressed. The AMT was originally put in place to restrict high income people from tax avoidance through the use of deductions. Taxpayers calculate their normal tax liability and the AMT separately and pay the higher of the two. It wasn’t indexed for inflation, and that’s where the “patch” comes in. Unless Congress acts before year end or retroactively, more taxpayers are going to be subject to the higher AMT in 2013.

The spending cut details

There is agreement that the government needs to cut spending, though dramatic cuts as scheduled could have a recessionary effect. As currently constructed, $110 billion in cuts will go into effect each year for the next ten years. The military budget will get hit hard and jobless benefits will expire for roughly 2 million unemployed. Social Security, Medicare, and Medicaid are not addressed in the impending cuts.

How high will the dividend income tax rate go?

Long term capital gains tax rates are going up, possibly to 25% but more likely to 20%. As for dividends, is it possible they’ll get taxed as ordinary income? Retirees and others with income portfolios count on dividend income to supplement bond interest. There may be a year or so left before interest rates begin to rise, making bonds less attractive. Does dramatically raising the tax on dividends help curtail a move from bonds to dividend paying stocks when interest rates go up?

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at dforbes@forbesplanning.com.


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