New York Estate Planning & Elder Law Blog
You cannot turn on the TV, flip open a newspaper, or pull up a news website this month without seeing the words “fiscal cliff.” As many are aware, this refers to sweeping, mandatory federal tax and budgetary changes that are set to take effect January 1st unless the Congress and White House pass legislation with an alternative plan. Essentially the “cliff” is about $7 trillion worth of tax increases combined with significant spending cuts across the board–including everything from Medicare and Medicaid to the military.
What is interesting about the cliff is that virtually no one on either side of the aisle actually wants it to take effect. Instead, it was only put into place as a compromise over a previous debt ceiling legislative fight. The idea was that that the cliff would be so abhorant to both sides that its impending appearance would force a compromise. However, as the end of the year gets closer, more and more observers are worrying that even with the serious consequences of the cliff, no compromise is in sight.
Currently, the Obama Administration and Congressional leaders (most notably, the Republican House leaders) are trying to reach agreement on an alterantive to prevent the mandataory changes. As part of that effort, President Obama recently released his “first offer.” As summarized in a recent article, the offer is far from what the Republican leaders have proposed, so it is unlikely that it will be taken seriously. Essentially, it calls for around $1.6 trillion in tax increases over a ten year period–mostly related to expiration of the so-called “Bush tax cuts.” In addition, it calls for modest stimulus spending. The proposal would also permanently eliminate Congressional control over the debt ceiling level (which caused the current crisis to begin with).
On the one issue that has the most direct impact on estate planning, the proposal calls for estate tax rates to return to 2009 levels. That is a $3.5 million exemption level and a top rate of 45%. That is compared to a current $5.12 million exemption at 35%.
What Does It Mean For You?
No matter what the final resolution, advocates, advisors, attorneys, and others on all sides of the issue agree that stability is key. For planning purposes, it is always advisable to know what the rules will be for the future, instead of having the risk of major changes every two years.
For those hoping to dig deeper, the Tax Policy Center has a “Fiscal Cliff Calculator” that allows you to plug in your own details and see how various proposals and the cliff itself will personally affect you. You may be surprised at the significant nature of the results. For example, the “cliff” affects everything from unemployment benefits to payroll taxes, and so everyone is likely to be affected, no matter what their current situation. Be sure to keep a close eye on the possible proposals as they are discussed in the coming weeks. It is also important to talk to your financial advisors and visit with estate planning attorneys to learn more.
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