Five Thorny Issues In The Next Five Weeks

November 20, 2012

There are several very difficult, very divisive issues that need to be resolve over the next five weeks or four of them will be automatically implemented on January 1, 2013. We know we are going to get higher taxes in 2013 and we may get some spending cuts (but I wouldn't hold my breath for much more than extensions).

Resolved, postponed, or kicked down the road, they should impact (including volatility) the economy and the markets. Following is a summary of these issues so you can begin to prepare for them.

1. The Fiscal Cliff

This is the automatic spending cuts and tax increases that go into effect on January 1, 2013.

The spending cuts amount to 3% of discretionary spending and 3% of defense spending. Per current legislation, the cuts are automatic and politicians cannot pick and choose which items to cut and which items to leave in place. However, as you could guess, they can vote to change anything; and they will because each side is not interested in cutting spending, they are only interested in saving or protecting the spending that is important to them.

Tax increases are also supposed to be automatic. If they are:

Personal income tax rates will rise to 39.5% for the top rate

The Alternative Minimum Tax (ATM) becomes a factor at lower levels

The 2% payroll tax holiday goes away

Estate taxes go back to 55% and for much smaller estates

2. ObamaCare Taxes become effective January 1, 2013

           

            Dividend tax rates go from 15% to your personal income tax rate

            Capital gains tax goes from 15% to 20%

            Investment tax (an additional tax) of 3.8% on dividends

            Exemptions reduced on child care credit and the marriage penalty is back

            Expense limits decrease (what expenses and amounts)

            State and local sales tax deductions are reduced

            1040 deductions reduced (medical)

            Flexible Spending Accounts will be limited to $2,500

            New Medicare wage and salary tax (0.9% above 200,000)

            New Medicare Investment tax of 3.8% (wages above $200,000)

Note: if these remain unchanged, you may have to consult your accountant. This information is only intended to illustrate what might happen and may not apply to any one individual.

3. Debt Ceiling Limit (will be reached before end of year)

This is not a new spending authorization; the increase is for spending which has already been committed to. Last time (last August) this "battle" resulted in a market decline of about 10% and a reduction in the U.S. Credit Rating. The credit agencies have said this new increase without a reduction in spending could result in another credit downgrade which could be a risk to interest rates and bond values.

4. FOMC Meeting and the end of "Twist"

The Federal Open Market Committee (the Fed) meets for its regular meeting on December 12. One thing under consideration will be the "Twist" program which was designed to keep long-term interest rates low and thereby help the housing industry will expire on December 31. Will they renew it, expand it or drop it in favor of something else?

5. Transaction Account Guarantee (TAG) expires December 31, 1212

In the debt crisis, the government (FDIC) raised deposit insurance from $100,000 to $250,000 and made it unlimited for non-interest bearing transaction accounts. When this expires, the estimated $1.4 trillion in cash accounts of corporations and other depositors could leave the small/medium-sized financial firms and go to the large, too-bigger-to-fail firms because they have an implied guarantee.