On Monday, November 21, the Deficit Reduction Joint Committee of Congress officially threw in the towel and announced that it was unable to reach an agreement on the $1.2 trillion in cuts in the federal budget mandated by the Budget Control Act of 2011. What does this failure mean to you and the typical American family as we move forward into 2012?
If the current gridlock continues in Congress, be prepared for several events in 2012. The first trigger will be the $1.2 trillion of automatic across-the-board spending cuts that are scheduled to begin on October 1, 2012. At the end of 2012 the Bush-era tax cuts will expire for everyone. There are also cuts in the payroll tax scheduled to end and the extension of unemployment benefits may not be continued.
From a planning perspective, be sure to build your budget without the 2% payroll tax cut. It's only a temporary cut so don't view it as a permanent part of the tax landscape. Use the extra money to contribute more to your retirement account or pay down high-interest debt. It will also be a good time to sell shares of stock or funds that have gone up in value and pay the current 10% or 15% rate instead of the 20% rate that the capital gains tax is scheduled to increase to. You can always reinvest the proceeds back into the same investments. You may also want to consider converting as much of your traditional IRA money into Roth accounts. Lower taxes in 2012 are the main incentive since the rates may increase if President Obama is re-elected.
If President Obama is re-elected and the Democrats maintain control in Congress, look for a repeal of the Bush tax cuts for individuals earning over $200,000 a year and couples earning over $250,000. There may also be a new tax rate on incomes over $1 million a year. Consider contributing more to your pre-tax accounts to lower your taxable income below the threshold. Also, consider converting your pre-tax accounts into Roth accounts to minimize your potential liability.
If the Republicans win the Presidency and keep control of Congress, the Bush tax cuts will likely be extended for everyone. In addition, look for tax cuts on investments including the possible elimination of all taxes on capital gains and dividends. Also, look for possible simplification of the tax code including the elimination of some exemptions, deductions and credits and additional ways to help pay for the lower rates.
In conclusion, whatever way the political landscape goes in 2012, be prepared for the mandatory deficit reduction cuts which could have a severe impact on the American lifestyle. In particular, be aware that these cuts could have a significant impact on entitlement programs such as Social Security and Medicare. Further, the cuts could negatively impact the education programs around the country that receive federal money from kindergarten through grade 12.
To explore effective tax planning opportunities, please contact Marc J. Lane at The Law Offices of Marc J Lane at mlane@MarcJLane.com or (312) 372-1040.
Richard Lindgren is an Associate Attorney with The Law Offices of Marc J. Lane, a Professional Corporation. He graduated with honors from Kent College of Law (J.D), holds a LL.M (Tax) from DePaul University College of Law, and a M.A.S (Tax) from Northern Illinois University. In addition, he is a Certified Public Accountant, Certified Financial Planner and Chartered Life Underwriter.
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