Ever since the Election -- we've been telling you all about the fiscal cliff and the uncertainty of what could happen as the December 31 deadline approaches.
Sarah Halpin CERTIFIED FINANCIAL PLANNER™ with the Danforth Group of Wells Fargo Advisors has some "DID YOU KNOWS" to help you cut thru the information clutter as the deadline approaches.
Did You Know -- Who coined the term "fiscal cliff"?
Federal Reserve Chairman Ben Bernanke is credited with coining the term "fiscal cliff" back in February 2012. It's the term he used to describe the tax increases and government spending cuts scheduled to go into effect in January, 2013. However, due to the phasing in of spending cuts and expected timing of any economic impact the "fiscal slope" or "fiscal hill" metaphor makes more sense than the "cliff" one.
Did You Know -- What taxes are currently set to increase in January?
The tax increase side includes the expiration of the Bush tax cuts which were put in place in 2001 - primarily covering income tax rates, long term capital gains, dividend tax rates and estate taxes. And a reduction in the current child tax credit. Also the expiration of the temporary payroll tax cut for workers, which was put into place last year. According to the Tax Policy Center, going off the "cliff" would affect 88 percent of U.S. taxpayers, with their taxes rising by an average of $3,500 a year.
Did You Know -- What federal spending cuts are scheduled to go into effect?
The $1.2 trillion in spending cuts agreed upon as part of the 2011 debt ceiling deal will begin to go into effect. According to Barron's, over 1,000 government programs are in line for cuts. According to the Congressional Budget Office, t
he federal spending cuts are phased in gradually from 2013 to 2012 with biggest cuts to the federal defense budget, infrastructure and social services then Medicare.
Did You Know - What is the economic impact to the fiscal cliff?
The Congressional Budget Office has forecast that implementing all the mandated government spending cuts and tax hikes would have a dampening effect on the economy and reduce real gross domestic product (GDP) by 0.5 percent in 2013, with growth sinking in the first half of the year before resuming at a modest clip later in the year. If lawmakers postpone tax hikes and spending cuts this could be viewed as irresponsible by credit rating agencies and the US debt rating could be downgraded again. On the upside the increase in taxes and reduction in spending will benefit the nation over the long term and reduce the deficit.
Did You Know - What is the most likely outcome?
Both parties will need to give something in order to get something and we may not see significant progress until the year end deadline is looming. However, the most likely outcome, is that lawmakers will find acceptable middle ground that will include some tax increases and spending cuts but not the full measure currently scheduled to occur. Both parties agree that the Bush-era tax cuts should be extended for the vast majority of Americans which is important common ground for negotiations.
Did You Know - What should investors do?
Whenever there is uncertainty, investors naturally become concerned about preserving retirement and investment portfolios. Making investment changes based on short term market activity can make it difficult to work toward your longer term goals. Review your investment plan and make sure your asset allocation (investment mix) is appropriate for your objectives and risk tolerance.