Updated Tuesday, July 29, 2014 as of 11:03 PM ET
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As Fiscal Cliff Approaches, Advisors Must Proceed Cautiously
Friday, November 16, 2012
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As we see Washington posturing over the fiscal cliff, we are right to wonder where the Statesmen (and women) are.   But what to do from an advisor’s perspective?

First of all – move cautiously – there is a great deal that is unsettled, and my experience in anticipating what “might” happen versus reality can be vastly different.

Look at rebalancing portfolios – it’s a good time – are you where your client wants to be?   What about year end gifts?   Currently any individual can give to any other individual as much as $13,000 per year – this won’t go away and in fact will increase to $14,000 in 2013.

We know that the lifetime gift tax exemption of $5.12 million per person / $10.2 per couple will disappear after December 31st  – those limits will drop back to $1 million/$2 million UNLESS the Congress acts to amend.   If you are in fact inclined to go forward with this, the property – be it real estate, shares of a private corporation, an interest in collectibles, etc. will need to have a CURRENT appraisal, otherwise will be disallowed.  

Should you take long term gains before year end?   Yes, if you no longer want to own the asset – no if it is something you thing has tremendous opportunity going forward.   If long term gains increase by one third – from 15% to 20% - is that so awful?   If long term capital gains are dropped entirely and everything switches to ordinary income tax rates, then possibly.   (I might add that we think that is highly unlikely.)  

Are taxes likely to increase?   Yes, we think tax rates generally are on the upswing, and certainly on those people earning more than $250,000 – the President has been very vocal on that score.   Remember that we have had ordinary income taxes as high as the 90 % level back in the 1950’s when we were paying for World War II and the debts incurred.   And our National Debt as a percentage of GDP has been much higher than the 24% we’re seeing now.   So we aren’t in the worst of times, although no one ever likes to pay a penny in taxes any way!

What about popular deductions, such as mortgage interest?   we don’t see that phasing out – it could be reduced from $1 million down to say, $750,000, but that would likely tank the real estate market which is the only bright spot currently so less likely to be changed at this time.

The economy is steadily improving, no agreement re the fiscal cliff would probably slow it down back to 1% growth rate from the anticipated 2.1% for 6 months or so, and might be better for the country.   My best guesstimate is that finally the really hard decisions will be postponed for a year or so, but we will see some changes in January – maybe not before!

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