By Danea M. Kehoe, Esq., Outside Counsel, DBK Consulting
CliffTax reform talk—and talk about certain (adverse) elements of tax reform that might move ahead of next year’s effort to overhaul the tax code—is heating up.
As Congress grapples with the looming fiscal cliff (some $7 trillion in tax hikes and spending cuts that, taken together, will adversely impact virtually every American), there’s more and more talk about “new revenue.” Right now, the GOP is butting heads with Democrats over whether to “close loopholes” or raise tax rates.
Our prediction? Congress will do both.
The changes may come prior to year-end, as part of the “down payment” Congress insists it will enact when it defers the $1.2 trillion sequester (automatic spending cuts) and extends 2012 tax rules (whether for everyone or just for those earning less than $250,000).
The adverse changes could take any number of forms. Some possibilities include:
- A cap on deductions
- A limit on the value of deductions, or the use of deductions, by “rich” people
- An increase in capital gains and/or dividends tax rates
- A tax surcharge on “rich” people
We don’t yet know the extent of the risk to life insurance, annuities, retirement savings vehicles, and employer-provided benefits. But bet on a hike in capital gains rates—that looks virtually certain. That will affect your clients who rely on you for financial planning advice and for investing in mutual funds. It may well affect your own financial situation, too.
Right now there’s a lot of political posturing going on. Remember, any agreement is going to contain elements that everyone hates—there may be tax increases, cuts to programs some lawmakers and their constituents care deeply about, changes to Medicare (possibly including Medigap) that could delay a person’s eligibility for the program, etc. No one is going to be happy with a final agreement, if one is reached (most insiders are betting Congress and the President will cut a deal). So it’s not surprising that agreement will not come until most lawmakers see absolutely no other choice.
And whatever gets done this year—if anything—bank on a fundamental tax reform effort next year. We’re in a period where are and must remain on “high alert.”