The Fiscal Cliff

No real danger, just be advised there is a "Fiscal Cliff" ahead.

No real danger, just be advised there is a “Fiscal Cliff” ahead.

As the end of 2012  looms on the approaching horizon, so does the so called “fiscal cliff.” But what does that even mean?

The “fiscal cliff” refers to a combination of spending cuts being implemented to reduce our deficit, as well as various tax cuts slated to expire at midnight on December 31st, 2012 if our congress fails to take action.  And, as you may well know, the ever widening partisan politics of our legislative branch now dangles these very same tax cuts and spending cuts in each other’s face and, consequently all of us, over the highly propagandized “fiscal cliff.”

How will this affect you and me?

Among the laws set to expire and/or take effect at midnight on December 31st 2012, are the payroll tax cuts, a rollback of the “Bush tax cuts” from 2001-2003, and certain tax breaks for businesses. At the same time, the taxes related to President Obama’s health care laws will also go into effect as will spending cuts agreed upon as part of the debt ceiling deal of 2011.

Let’s take a closer look.

Payroll Tax – The expiration of last year’s temporary payroll tax cut would result in a 2% tax increase for workers moving the employee payroll tax rate of 4.2% back up to 6.2%.

Bush-era Tax Cuts – At the end of the year, the Bush-era tax cuts are also slated to expire. Unless they are extended, tax rates will revert to 2001 levels and nearly all Americans will see their tax rates go up.

Capital Gains and Dividend Taxes – The expiration of the Bush-era tax cuts will also bring changes to capital gains and dividend taxes. In 2013, the top capital gains rate for most investors is slated to go from 15% to 20 %. Taxpayers in the current 10% and 15% tax brackets, who currently don’t pay tax on long term capital gains and dividends, will pay 10% on long term gains.

The treatment of dividend income – At the moment, income from qualified dividends is treated as capital gains and taxed with a rate of 15%. In the new year, dividends income will be taxed as ordinary income, with a top rate of 39.6%. These changes in particular could result in substantial increases for high-income earners.

Estate Tax – The estate tax is also scheduled to jump from 35% to 55% in 2013, while the value of estate assets excluded from estate taxes will drop from $5.12 million to $1 million.

In general, Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties truly want to avoid running off this “fiscal cliff,” a compromise appears to be very difficult to achieve as this problem in an ongoing one that our politicians have had well over a year to address. As of this publication, it would appear that a compromise of any kind will not be reached until after the December 31 deadline.

Regardless of what happens to the tax code in 2013, it’s important to plan for your financial future. Working with a tax professional and a financial advisor can help you prepare for these changes. If you need a referral, I happen to know the two best tax professionals in the entire nation: Lawrence and Linda Chaves, my mom and dad.

Call me today to discuss your real estate goals for the new year. 310-722-5959.

Lawrence Chaves
DRE #01893036


About Lawrence Chaves

Lawrence Chaves Keller Williams Beach Cities BRE# 01893036 Member of the South Bay Association of Realtors, California Association of Realtors, and National Association of Realtors. Specializing in residential and income properties in the South Bay and Beach Cities of Los Angeles County. 1st time buyers & new to the South Bay are welcome. Taking appointments now. 1601 Pacific Coast Hwy Ste. 265 Hermosa Beach CA 90254 Phone: 310.722.5959 Email: Website:
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One Response to The Fiscal Cliff

  1. Linda Chaves says:

    Here’s some additions etc..I have more..don’t know how depressed you want your readers….

    Bush-era Tax Cuts – At the end of the year, the Bush-era tax cuts are also slated to expire. Unless they are extended, tax rates will revert to 2001 levels, nearly all American taxpayer will see their rates go up, the highest income rates will increase from 35 to 39.6 percent.

    The Alternative minimum tax if not adjusted for inflation will effect
    all middle-class households with kids and earning around $75000, The AMT will add $3700 on average to their 2012 tax bill.

    Your refunds will be delayed if a deal is not made by Dec 31. as the
    government will try to scramble to revise tax forms to reflect the
    changes post-cliff. The Tax Season has already been delayed til Jan 22 so far and refunds will now take longer to get to you.

    Those with Children will be hit the hardest as some of the tax Credits expiring on Dec. 31 include the Child Tax Credit($1000 per child), Earned Income Tax Credit( third child doesn’t count) Dependent Care Credit(lowered) and American Opportunity Credit (in 2013 it reverts to the Hope credit meaning College Costs for only the first two years will count)

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