Accounting News

Friday, September 21, 2012
Tax Planning with Fiscal Cliff

The end of the year is creeping up and with it the "financial cliff" from the expiring tax and spending laws. The expiring laws include the $1.2 trillion in spending cuts in January that were mandated as part of the deal reached to cut government spending. They were set up to be across the board cuts to force the jSimpson-Bowles commission to make more strategic cuts. In the end the Simpson-Bowles commission could not reach an agreement so cuts to most parts of the federal government are on the schedule.

The second part of the financial cliff is the expiration of the "Bush tax cuts." This would raise the income tax rates on almost every tax payer. There are also payroll tax cuts that are set to expire at the end of the year.

With the upcoming election there is no plan to change anything until after November. Senate Majority Leader, Harry Reid believes a compromise is possible and is working for a longer term solution. While the House Speaker John Boehner in much less optimistic saying he is “not confident at all.” But this is most likely political posturing since very few people seem willing to go over the financial cliff.

The problem for accountants is helping businesses and individuals start their tax planning. Since many small business have revenue that passes through to owners (limited liability corporations) the tax rate can change their plans for taxes. The tax rate will also impact how much cash will be on hand for the business for re-investing in 2013.

Democrats are interested in keeping the tax cuts for only some tax brackets while the Republicans favor keeping the cuts for all tax brackets. The most likely scenario is that most of tax cuts will remain for another year. Then both sides will say that they will have a long term solution next year at this time. I think most people would like to see solutions that are longer than a year.

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