Fed Chairman Bernanke stated, “Under current law, on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.”
Everyone has likely heard plenty about the inevitable tax and spending changes coming at the end of this year. Change will occur whether it is by default (in the event Congress and the President do nothing) or whether it is by our leaders’ own actions prior to midnight on 12/31/2012. When evaluating certain wealth planning strategies that have to do with income tax, estate tax, levels of projected growth and the like, a world rife with uncertainty can be challenging for the key financial decision maker in the average American household.
Even decisions as simple as whether to keep a balance on your Home Equity Line of Credit at very low rates (but adjustable rates) or move this balance onto a traditional fixed mortgage that offers interest rate “safety” become very complex. As of this writing, the national average for a 30 year conventional mortgage sold to Fannie Mae is 3.9%- close to the all-time historical low of 3.81%. What about charitable gifting? Should a high income family defer charitable gifting into 2013 or make several years’ worth of gifts this year in anticipation of possible tax law changes? Another example is the age-old question of whether one should pay down debt or invest free cash flow. Like any of these decisions the best answer is highly dependent upon the circumstances, but the 3.8% Medicare surtax (set to go into effect in 2013) and potential capital gain and dividend tax rate changes complicate things.
In our experience, perspective is invaluable when evaluating these financial decisions and others. As our country attempts to solve its fiscal crisis, baby boomers age, and the world faces economic and political challenges, thinking through these decisions in all possible scenarios becomes more valuable. In other words, good decision making increases in value as challenges and complexity presented by your environment increase. We will continue to work hard preparing updates to client wealth plans to evaluate all possible options in light of the ever-changing world in which we find ourselves.