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Nov 14, 2012

Have you heard about this “Fiscal Cliff” thing?!  It sounds scary!   

So, what is it?  In a nutshell, it's a term that describes the financial difficulties our country could face as a result of some pending legislative changes. Unless lawmakers decide to make a change by 1/1/13, a number of tax increases and spending cuts will go into effect and they are expected to weigh heavily on the economy.  

If I were about to walk off a cliff, I would want a friend to try to help me avoid it.  I’m not saying you’re about to fall off a "Fiscal Cliff", but maybe you’re about to take a nasty step off a curb without knowing it (by the way, click here for “5 Financial Mistakes Smart Chicks Make”)

This can be pretty complicated stuff, so I reached out to an expert for help!  Ryan Anderson is qualified because he’s a CFA Charterholder and Vice President of Investments with UBS in Dallas.  Personally, he's helped my family make some major financial decisions....and his wife tells me he's a great husband and dad to their one-year old son!

If these 5 tips sound like they might apply to you, take this article to your financial advisor and talk through it with the expert BEFORE 1/1….it could save you a lot of money and frustration!

1)  The Bare Minimum

The Alternative Minimum Tax (AMT) is a second tax on higher incomes.  It’s been around a while, but has only affected about 4 million Americans.  If the lawmakers don’t make a decision to stop/slow the pending law changes, 24 million additional Americans could be paying this tax.  Consult with your tax advisor to see if this tax could affect you and how to minimize the impact.  Since property taxes are one of your biggest deductions, be smart about when you pay them. If you’re affected by the AMT, you may not get the full value of the deduction if you pay in 2012. 

2) Brilliant Deduction, my dear!

No one knows what will happen with the tax environment in 2013 (and beyond).  BUT, in 2012 you will receive full benefit for your deductions (mortgage interest, charitable donations, property taxes, etc.).  There’s talk of limiting the value of deductions in the future. If no action is taken by 1/1/13 and the current tax cuts expire, your deductions could mean less as your income rises.  Now is the time to estimate what your payment/refund might look like and determine if it would benefit you to claim more deductions this year.

Legal Savings

3) Get Now and Give Later

A Donor Advised Fund (DAF) allows you to make a contribution into a charitable fund, receive a tax deduction now, and get the flexibility to distribute donations from the fund at a later date.  It’s kind of like a holding pen for your donations.  This can be helpful if you want to accelerate charitable donations in the current year, but aren’t sure which charities you want to “bless.”

4) Losses Can Be Good 

Let’s say you’ve done well in the market this year…yay!  Unfortunately, you get taxed on those gains (insert bummed face here).  This is what’s called a “capital gains tax.”  You could sell some of your investments at a loss to offset a capital gains tax liability.  In other words, instead of paying the IRS with a check in April, you can sell off an investment(s) before year-end to pay for the taxes on the gains.  And thinking ahead, you could do this NOW even if you don’t have any gains.  That way, you can bank some dollars to pay for taxes on future gains (it’ll happen!).  This is an even better idea if future tax rates go up because you can set aside funds now for gains that are taxed at a higher rate later.  One bit of caution:  to get the full benefit of the loss, wait at least 30 days after selling before buying back the same investment.

5) Healthy and Wealthy?

As part of the ACA (healthcare reform or Obamacare – click here for “10 Ways Obamacare Will Affect You”), higher-income Americans will pay an additional 3.8% tax on income from their investments (in addition to any other tax increases that may come).  Also, if the current tax cuts expire, dividends could go from being taxed at 15% to your ordinary (higher) income tax rate.  If you’re living off those dividends (vs. re-investing), review how this might affect you and make sure your after-tax investment income in 2013 and beyond is sufficient to keep up your lux lifestyle. 

The election is over - we’re now in the hands of our elected officials as to whether we’re going over the edge of the Fiscal Cliff, standing behind the railing or maybe hanging off the edge a little.  Hopefully, you got a few tips that’ll protect your family from that “fiscal curb” you could be about to step off.  

Ryan shared this helpful “2012 Year End Planning Guide” if you want more info on these issues!


Reid has a passion for helping brokers & employers strategize fresh approaches to benefit plans that contain costs and increase access to care - helping employers & employees control their healthcare dime, time, and peace of mind. He writes & speaks around the country and is the Co-Founder & CEO of freshbenies.

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