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Brad Tinnon

Understanding the Fiscal Cliff

Last year we witnessed many children fighting over their toys.  I mean, we witnessed Congress have a very kind spirited debate regarding government taxation and spending.  At the eleventh hour (i.e. 1/1/13) Congress finally came to a bi-partisan agreement over the tax issue (notice that I didn’t say that they “resolved” the issue).  So, as of now, the taxation side of the coin has been dealt with and over the next couple of months, Congress will be working on how to reduce spending.  With that in mind, let me share with you some specific bullet point items regarding the recent Fiscal Cliff legislation that was hammered out.

PAYCHECKS WILL BE LOWER – The payroll tax holiday is officially over.  During the last 2 years, you were paying a reduced rate of 4.2% for social security taxes.  As of 1/1/13, the original rate of 6.2% will apply.  Essentially you will likely notice that your paycheck will be around 2% lower.

INCOME TAX BRACKETS – Income tax brackets will remain the same so long as your taxable income is $400,000 ($450,000 if married filing jointly) or less.  Above these thresholds, you will face an income tax bracket of 39.6% (up from 35%).

CAPITAL GAINS RATES / DIVIDENDS – If your taxable income is $400,000 ($450,000 if married filing jointly) or less your capital gains and dividend tax rates will remain unchanged at 15%.  Above these thresholds, you will face a rate of 20%.

NEW TAXES DUE TO HEALTHCARE REFORM – If your Modified Gross Income is more than $200,000 ($250,000 if married filing jointly), then you will face a 3.8% additional tax on capital gains (meaning that your top rate could be 18.8% or 23.8%).  Additionally, you will face a 0.9% increase to the amount you pay in Medicare tax.

DEDUCTIONS, CREDITS, AND EXEMPTIONS – If your Adjusted Gross Income is more than $250,000 ($300,000 if married filing jointly), then you may not qualify for certain deductions, credits, and exemptions.

These are just a few of the highlights (or lowlights) that came as a result of the recent Fiscal Cliff legislation.  Despite the new rules, it is important to note that companies continue to remain profitable.  In fact, it may surprise you to know that the S&P 500 returned 16% in 2012 despite all of the bickering in Washington.  Based on all of this, our investment strategy remains the same: stay committed to a well diversified portfolio which has access to many different investment categories (i.e. thousands of different stocks and bonds as well as access to various alternative investment categories).  Additionally, when the stock market sways back and forth, this can be beneficial to you since we rebalance portfolios daily as needed.  This allows us to potentially buy into investment categories that have fallen in value (i.e. buy low).

We will keep you informed as the financial / economic landscape unfolds this year.  As always, please feel free to call or email if you have any questions.  Thank you for trusting us to handle your financial planning and investing needs!!

Brad Tinnon, Owner

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