How the Fiscal Cliff Deal May Affect You

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Winter 2012-2013

When Congress agreed on a deal to avert the fiscal cliff in January, it was clear that some of the choices made in the American Tax Relief Act (ATRA) would impact high net worth individuals. Despite that reality, there’s one positive outcome that most experts agree on: Any deal is better than the uncertainty of not knowing.


“The reaction from a lot of our clients was relief,” says Sally Mullen, Chief Fiduciary Officer for The Private Client Reserve. “It provided more clarity around estate planning than we have had in years.”


The fiscal cliff deal also may have helped avert a serious slow down in the economy, says John De Clue, Chief Investment Officer for The Private Client Reserve. “Had nothing been done, we estimate the fiscal cliff would have impacted Gross Domestic Product by as much as 4 percent,” he says. “It would have thrown us into a recession, and the markets would have faced tremendous pressure.”


The new tax rates and rules that came out of the deal won’t solve our economic woes, but De Clue predicts the impact will be limited to just 1 percent of GDP, driven largely by the expiration of the payroll tax cut, which was intended to be a temporary measure, he says.

Now that Congress has passed the fiscal cliff resolution, it’s a good time for high net worth individuals to reassess their investment portfolios, estate planning strategies and wealth management goals to see how the provisions of ATRA might affect them and what they can do to potentially minimize that impact. Learn what the deal may mean for you:


Estate Taxes

The fiscal cliff deal made permanent the $5.12 million estate tax exemption, and indexed it to inflation. The deal also made permanent a 2010 rule that surviving spouses can use any unused exemptions from their spouse’s estate. 

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Winter 2012-2013

This is great news for high net worth individuals, as there had been talk of lowering the exemption to $1 million, De Clue says. The permanency of the exemption enables wealthy individuals to have more confidence in their long-term plans. “Clients now have more certainty to help make decisions with more confidence,” he says.



Individuals who earn $400,000 or more, or couples earning $450,000 or more, now face an increase in their tax rate from 35 percent to 39.6 percent. The deal permanently extends the Bush tax rates below those thresholds.

Mullen advises individuals whose income tends to fluctuate around this threshold to talk to their tax and legal advisors about potentially accelerating payments or deferring deductions to stay within that window. Gifting of low basis stock may also help investors avoid the higher tax.


Capital Gains Rates

Capital gains tax rates also rose from 15 percent to 20 percent for taxpayers in the 39.6 bracket. Keeping mind that due to the Medicare surtax, there’s an added 3.8 percent tax on net investment income of individuals, estates and trusts. “It’s important to remember that these taxes can apply to passive income, including money from a family business, or income from rental property,” Mullen says.

Alternative Minimum Tax


The fiscal cliff deal also permanently fixed the Alternative Minimum Tax (AMT), which ensures high-income individuals, corporations, trusts and estates pay at least some taxes, regardless of deductions and exemptions. The original tax wasn’t indexed to inflation, which meant Congress had to patch it every year through temporary legislation so middle-income individuals wouldn’t be overly burdened.


Like Social Security benefits, the AMT is now indexed to inflation, which means the income threshold for being subject to the AMT will rise automatically each year in line with inflation.


“We think it’s much better than just another patch because it eliminates uncertainty down the road,” De Clue says.


Your Wealth Management Advisor will work with your tax and legal advisors to help you figure out the best options to reduce these taxes, Mullen says. “Even though the fiscal cliff deal brought clarity, it’s still a complex tax system, and we haven’t seen the last of the changes to come.”


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