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Financial Planning > Tax Planning > Tax Reform

Avoiding the fiscal cliff

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Washington is again focusing on the so-called fiscal cliff now that the election is out of the way and there is strong evidence of a “grand bargain” being agreed to by Congress and the White House by year-end in order to avert a dramatic impact on the economy.

President Obama signaled support for a compromise in accepting Mitt Romney’s concession early Wednesday. Later in the day both Senate and House leaders made statements implying that talks are underway.

The issue boils down to the fact that $668 billion in total spending cuts and tax increases will take effect January 1, constituting 4 percent of total gross domestic product.

Also critical is that estate tax policy will revert to 2001 levels if there is no action. If Congress fails to act, 14.7 million U.S. households would have a potential estate tax liability, according to LIMRA.

The consensus of congressional staffers is that there will be a one-year deal to avoid the huge year-end impact.

The sources say that this deal would include an agreed-upon deficit reduction number, including an agreement for tax reform that brings in revenues.

One industry lobbyist said that part of the package would preserve all or some of the Bush-era tax cuts and part of it presumably would deal with raising the debt ceiling while yet another component could address payroll tax relief and the 29 percent decline in payments to physicians as of year-end; the so-called “doc fix.”

This scenario envisions parts of the health care reform law “coming into play here as well,” perhaps as a short-term delay on exchange subsidies to allow states more time to get them up and running.

One lobbyist explained that, “the idea is to avoid sequestration, cut a deal and tee up deficit reduction and tax reform in regular order next year.

“Anything less than a one-year deal, at least according to Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, doesn’t work,” this lobbyist said.

“Without Congressional action, estate taxes will go to a $1 million exemption and a 55 percent top rate (instead of a $5.1 million exemption and a 35 percent top rate),” said Diane Boyle, vice president, federal government relations, for the National Association of Insurance and Financial Advisers (NAIFA).

“NAIFA supports meaningful, sustainable estate tax reform that provides certainty for clients to do their planning and take action,” she said.

“Unfortunately, there is enormous uncertainty in the political environment and even greater uncertainty regarding the details if Congress does act,” Boyle said.

Chris Morton, vice president of legislative affairs for the Association of Advanced Life Underwriting sees two potential scenarios.

One involves the consensus view voiced above of a framework agreement for approaching deficit/tax reform.

The second scenario Morton sees is that “Because most of the game [favors] President Obama in terms of the expiration of the Bush tax cuts and in terms of the reversion of the estate tax to $1 million/55% top tax rate, etc., he may have leverage to negotiate.”

And, Morton said, “if there is pressure from the business community to get a deal, not just to punt, but to get an actual resolution to some of the issues, then you may see the top marginal rate expire and go back to 39.6%.”

Joel Wood, senior vice president of the Council of Insurance Agents and Brokers, added that, “The fiscal cliff and the upcoming lame duck session of Congress are going to put President Obama and congressional leaders to a significant test, especially as only 16 days are scheduled for Congress between now and the end of the year,” said

He said that “With the looming economic deadlines – expiration of the Bush-era tax cuts, sequestration, the debt ceiling – there will be tremendous pressure for a deal to be reached.

“There are many scenarios here, but I believe the most likely is a one-year deal that includes spending reduction targets and tax reform that will be hashed out in 2013, while extending to some extent the expiring laws, both on marginal rates and the payroll tax reduction,” Wood said.


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