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The Advisory Firm Newsletter:  June 2012

THIS MONTH IN PERSONAL FINANCE: Heard about the Fiscal Cliff?


There has been a lot of talk lately about the potential "Fiscal Cliff" that is heading our way starting January 2013. For some fun early summer reading I will give you a brief rundown of what all this means and how it may affect your investments. We will also touch on changes in the Estate Tax code that will be happening at the same time.


By now you are probably sick and tired of hearing about deficits and goverrnment spending, but get ready because it is about to get worse as we head toward the second half of the year. If you thought that the European financial issues would never seem to leave the headlines, just wait for the US financial issues to begin to hit the press. And you can bet they will! Not only because of election year politics but for some key items expiring at the end of this year.

Taxes going up?

There are essentially 3 parts to the impending Fiscal Cliff. All involve either taxes going up or goverment spending going down. The basic reason for the panic is that these events will take money out of the economy further slowing our growth.

1. Income Taxes and Capital Gain taxes going up: The Bush Tax cuts are set to expire (again), after being extended. This means that most income tax rates will rise across the board beginning next year. Here is a graphic to give you a comparison:

2012 tax rate 2013 tax rate LT Cap Gain Tax
15% 15% 15%
25% 28% 20%
28% 31% 20%
33% 36% 20%
35% 39.6% 20%


2. Temporary Payroll Tax Holiday goes away: Not sure if you noticed but in 2011 and 2012 the Social Security tax commonly withheld from your paycheck was 4.2% instead of the traditional 6.2%. This was a temporary fix to put more money in consumers pockets that is scheduled to end this year.

3. Mandatory Federal Spending Cuts: Do you remember last year when Congress had a special bipartisan committee that was to hash out ways to reduce the national debt? The deal was if they failed to reach an agreement then mandatory across the board cuts would be instituted that would reduce the Federal debt by $1.2 Trillion over 10 years. Well it won't surprise you that they could not compromise, so beginning in 2013 an automatic round of spending cuts kicks in.

Why should an investor care?:

There has been projections that say if all of these items kick in during a fragile recovery it could throw the country back into a recession. A recession is defined as 2 consecutive quarters of a shrinking economy, and that also means lower equity prices.

Could it get worse?:

Did I happen to mention that the US Government will hit its debt ceiling again this fall? (you remember all of the fireworks last August around this issue?) This can only mean more theatrics and threats of more US downgrades from the ratings agencies.

Don't shoot the messenger:

I realize this is a lot to throw out there as you were settling into your Summer vacation routine, but it is reality and unfortunately the only way to get through it is to go through it. As far as investing advice, adjust your portfolios accordingly as we will probably be riding this roller coaster for a couple of more years.


What is changing with the ESTATE TAX:

Since we are talking about topics our elected leaders don't like to make a decision on, how about the Estate Tax!

Washington can't seem fix this one either. Since the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA for short), the Estate tax was changed up until 2010 to allow for higher thresholds before someone fell into the Estate Tax issue.

In 2010 the Estate Tax was repealled for that year and then with another temporary fix was reinstituted in 2011 and 2012. Today someone dying with a $5 Million dollar estate and under will not be subjected to Federal Estate Taxes, however if that person were to live one day into 2013 then the estate taxes will be $2 Million (based on sunset provisions).

This whole hot potato issue of Estate Taxes has given Estate Attorneys and Planners fits as it is very difficult to plan for a moving target.

If your estate is under $1 Million you probably don't have an issue with estate taxes, but that doesn't mean you should not have an Estate Plan. If your estate is over $1 Million you could end up in the crosshairs of the Estate Tax. Remember this doesn't have to be $1 Million of liquid assets. You have to figure in Life Insurance proceeds, real estate, business assets along with cash and investments.

Odds are that one day Congress will actually do something about the Estate Tax, and it may happen as soon as this Fall. However, judging by past performance it may once again be a temporary patch.

Planning Opportunities: This year still allows individuals to gift a substantial amount of money and/or assets. Talk with your Estate Attorney about whether your estate would benefit by gifting some assets now.



I am always on the lookout for a topic to write about, and will try and pick something a bit more upbeat next month, so feel free to email me if you have a specific question or newsletter idea. (click below)

James Daniel, CFP


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The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.