Almost immediately after the election, the national conversation turned to what is widely seen as an impending financial crisis known as the fiscal cliff. A dramatic term, for sure, but what does it mean for the economy, investment advisors and their clients?
The term "fiscal cliff" refers to a set of tax increases and spending cuts that will automatically take effect in January if Congress does not take action. On the tax side, the Bush-era cuts of 2001 and 2003, and their renewal in 2010, are scheduled to expire at the end of the year, while a number of other tax issues are in play, including an expiration of a temporary payroll tax holiday and the question of whether lawmakers will restore an elevated exemption level in the Alternative Minimum Tax. The expiration of the Bush-era cuts would increase rates on a broad measure of tax classes, including ordinary income, capital gains and dividends. Going over the fiscal cliff would increase federal tax collections by more than 20% next year, or more than $500 billion, according to the Tax Policy Center, a nonpartisan think tank. That would drive up taxes on nearly 90% of households by an average of $3,500.
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