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The Fiscal Cliff – What It Means For You and Your Planning

Political news for the rest of the month will be dominated by talk of one thing: the ominous “fiscal cliff.” So what exactly is it and how might it affect you?

The “cliff” refers to a series of mandatory spending cuts and tax increases that are set to take effect at the end of the year. They will be avoided only if Congress and the President reach an agreement on an alternative compromise plan. The cliff itself would cause about $600 billion in immediate spending cuts on top of $500 billion in annual tax increases. While this drastic action may help realign a budget in the red, it also has many worried that it could send the country into another recession. Few on either side of the aisle actually want the specific proposals in fiscal cliff to take effect, but they do not see eye to eye on the alternatives.

If the stalemate cannot be broken, what does that mean for you?

As an estate planning matter, perhaps the most obvious implication is a change in the current estate tax rules. Right now the exemption level for the tax is $5.12 million, with a maximum rate of 35%. If the fiscal cliff occurs, then the “Bush tax cuts” will expire. That means that the federal estate tax will kick in at the $1 million exemption level with a maximum rate of 55%. The Republican-controlled House opposes any increase in the tax. The White House believes that rates should be higher than they are now, but they do not want to increase them to pre-Bush tax cut level. Instead the President has proposed an exemption level of $3.5 million and a rate of 45%.

It is important not to forget that the tax generally does not apply to spouses who inherit or money that is donated to certain charitable organizations.

But the estate tax is only one part of the complex range of issues affected by this cliff. A succinct summary of the details of the fiscal cliff can be found in this CNN Money article. There are many other taxes that are set to increase in 2013 unless a compromise is reached. Income, capital gains, and payroll taxes will all rise while various deductions and credits are eliminated.

On the spending side, one issue which many seniors may be concerned about is Medicaid. Ensuring a loved one has access to the long-term care they need in their golden years often depends on access to Medicaid support. Fortunately, Medicaid is specifically exempt from the cuts included in the fiscal cliff.
Conversely, certain Medicare payments to doctors may be decreased as a result of the cliff, due to the expiration of a “fix” which increased rates to medical professionals by about 27%

As always, it is a good idea to follow the developments of these issues to determine how they will affect you and your family. For information on how the changes could alter your long-term care plans and inheritance planning details, it is important to talk with a legal professional who can provide tailored advice. The attorney at the Law Office of Scott C. Soady is available to help in San Diego and surrounding communities.

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