Fiscal Cliff 2012

Now that the Presidential race is over and we know who will be leading our country for the next 4 years, all attention has turned to the serious financial challenges that face our nation if Washington fails to take action by this December 31st, 2012 the date which marks The Fiscal Cliff.


The consequences of going off The Fiscal Cliff is a combination of two major government actions that were set in place during 2011 and 2012; Automatic government spending cuts (commonly referred to as Sequestration) and significant Tax Increases, all of which equates to somewhere between $500 to $817 Billion in deficit reduction, which is also referred to as Taxmaggedon. While both the tax increases and the spending cuts will have a significant impact on the US and global economies, they will have the most drastic impact on American families and business owners.


So whether you are an investor, a small business owner, a home owner or unemployed, inaction by Congress will affect you. So it is important for families and business owners to know what is included in these tax increases so that they understand the impact on their financial future and can make the necessary changes going forward. The following highlights, at a high level, the various topics currently being discussed in Washington that will have the most significant impact on the majority of Americans.


These are the major issues the President and Congress must act on:


  • The Payroll Tax Holiday
  • The Affordable Care Act (ACA)
  • Debt Ceiling and the Budget Control Act
  • Alternative Minimum Tax (AMT)
  • Bush Tax Cuts
  • Unemployment Benefits
  • The “doc fix”


The Payroll Tax Holiday expires

For 2011 and 2012 the employee portion of FICA was reduced by 2%. This reduction will end on December 31st which means starting in January the FICA amount withheld from your Paycheck will increase by 2%.


The Affordable Care Act (ACA) or Obamacare

The Affordable Care Act included two new taxes to help cover the cost of the increased Healthcare benefits. These taxes are;

  • Unearned Income Medicare Tax (UIMC) – 3.8% on unearned income.
  • Increased Hospital Insurance (HI) tax – 0.9% on earned income for individuals with more than $200,000 in income and married couples filing jointly with more than $250,000 in income.

Additionally, the ACA raises the threshold to claim medical expenses as an itemized deduction from 7.5% to 10% of adjusted gross income for individuals under age 65.


Debt Ceiling and the Budget Control Act (Sequestration)

The current debt ceiling is $16.394 Trillion and at the time of writing this article the US Public Debt subject to limit is $16.166 Trillion and is increasing at an average of $3.87 Billion /day.

The Budget Control Act or Sequestration will kick in at the beginning of 2013 which will dramatically cut funding to many government departments as described below:

  • 9.4% reduction in Non-exempt defense discretionary funding (keeping military bases open, paying salaries and research and development)
  • 10% reduction in Non-exempt mandatory defense spending
  • 8.2% reduction in Non-exempt, non-defense discretionary funding (Congress authorized programs such as Head Start and AIDS assistance)
  • 7.6% reduction in non-exempt, non-defense mandatory programs (Not much left here to cut. Most are exempt)
  • 2% reduction in Medicare budget


Alternative Minimum Tax

The Alternative Minimum Tax (AMT) patch which has historically been renewed at the end of each year, ended last year. So currently the AMT will affect 30 million more Americans this year unless congress patches it again.


Bush Tax Cuts

What is referred to as the Bush Tax Cuts will expire on December 31st, 2012. The Bush Tax cuts are the changes that were made by the 2001 EGTRRA and the 2003 JGTRRA acts.

In 2001 EGTRRA was passed which:

  • Lowered income tax rates

The expiration of the Bush Tax cuts will revert the income tax rates back to rates prior to 2001

10% bracket – gets rolled back into the 15% bracket

25% bracket – returns to 28%

28% bracket – returns to 31%

33% bracket – returns to 36%

35% bracket – returns to 39.6%


  • Changed deductions and credits(Marriage penalty returns)

EGTRAA increased the standard deduction for joint filers by allowing tax payers who file as married filing jointly who do not itemize, to claim the standard deduction for both spouses (i.e. 200% of the deduction). This will revert back to only 167% of the deduction.

The 2012 standard deduction is set at $11,900 which will be reduced to $9,900 in 2013.

Dependent Care Credits will go from $3,000 to $2,400 for a single dependent and from $6,000 to $4,800 for two or more dependents.


Child-care credit maximum will be reduced from $1,000 per child to $500 per child.


Student Loan debt will now have a cut-off date for interest payments of 60 months.


The Employer paid job training or continuing education exclusion of $5,250 will end in 2013 which means this benefit will now be taxed as regular income for the employee.


  • Simplified retirement savings

The Bush Tax Cuts introduced sweeping changes to retirement plans in general.

An in depth coverage of these changes is outside the scope of this document, the following are the high level changes.

Raised the pre-tax contribution limits for defined contribution plans and IRAs

Increased defined benefit compensation limits

Made non-qualified retirement plans more flexible

Created “catch-up” provisions for older workers

Created the ROTH 401(k)/403(b)


  • Estate and Gift Tax rules

EGTRRA made sweeping changes to the Wealth Transfer Taxes; the estate tax, generation skipping transfer (GST) tax, and gift tax. With the expiration of the Bush Tax cuts the unified credit exclusion reverts from $5,120,000 back to $1,000,000

The Maximum estate tax, gift tax and generation-skipping tax rate will rise from 45% back up to 55%.

The state estate tax credit will revert back to a deduction for state estate taxes

The gift tax rate was further reduced to 35% in 2010 this will revert back to 55%


In 2003 JGTRRA was passed which:

  • accelerated the cuts passed with EGTRRA
  • increased the exemption amount for AMT
  • lowered the tax rates for dividends and capital gains

People in the 15% tax bracket had their Capital gains tax rate reduced from 10% to 8% on qualified gains of property or stock. This will revert back to 10%.


Unemployment Benefits

The standard unemployment benefit lasts for 26 weeks. Over the last 4 years this has been extended through two programs: the Emergency Unemployment Compensation Program (EUC) and the Extended Benefits program. The EUC provided upto a total of 53 weeks of extended benefits and the Extended Benefits provided 13 to 20 weeks of additional unemployment compensation. When all is totaled, an individual could receive up to 99 weeks of unemployment compensation. At the end of this year the bulk of these extensions will end which will revert the unemployment benefit back down to the standard 26 weeks.

Doc Fix on Medicare

Each year congress votes to delay the Medicare Sustainable Growth Rate Formula (the “doc fix”) from going into effect. If this is not continued this year it will result in an immediate 27% cut to Medicare physician payments.


The above highlights should help you understand the issues being discussed in Washington and the potential impact they might have on your financial future. For more specific information regarding your unique financial situation I strongly recommend that you sit down with your Tax and Financial advisor to discuss any concerns you may have.


Raise the Taxes on the Ultra Rich

When the current administration took office it was focused on increasing the taxes on corporations and closing the tax loop-holes that multi-national corporations used to avoid paying taxes here in the United States. One of the unfortunate side affects of this change was that some of the largest multi-national corporations decided to move their headquarters outside of the United States. Another side affect of all the tax talks surrounding the corporate tax code is that corporations decided to increase the amount of cash on hand so that when the tax changes were made they would have the necessary funds to cover their new tax liability.

Now the talk is really heating up about increasing the taxes on the Ultra Rich (the Millionaires and Billionaires) in the US. The majority of the Ultra Rich make their money through investments. These investments provide large sums of capital to businesses which in turn use the capital for research and development, expansion, increased production, etc… So will we begin to see some of the same changes that we saw with corporations over the last two years begin to happen with the Ultra Rich? Will the Ultra Rich begin to increase the amount of money they hold in cash and other low risk alternatives? Will the Ultra Rich decide that it is time to retire and or move out of the United States? Either of these alternatives would reduce the amount of capital available for corporate America to invest in growth.

So if the Ultra Rich do decide to reduce the amount of money they invest in corporate America that will have a harmful affect on our economy. Whether you like the idea of increasing the taxes on the Ultra Rich or not, the impact of what the Ultra Rich do with their wealth could have a significant impact on all US citizens. How will their decisions impact you?

Black Belt of Personal Finance

For the past couple of years I have been working towards achieving a black belt in Tae Kwon Do and during the same period I have also been working through the process of achieving my CFP® designation. Last year as I was gearing up to sit for the CFP exam I had an epiphany. The process to obtain a black belt in Tae Kwon Do (and many other martial arts forms) and the process to receive a CFP designation are strikingly similar. Below is a high level look at the requirements for each program.

The black belt curriculum requires each student to accomplish the following:

  • Semi-Monthly testing to advance to the next rank
  • 2-3 years of practice
  • A 16 week testing cycle to demonstrate mastery of all program material
  • A community service project
  • On going practice for life

The CFP certification process requires each applicant to accomplish the following:

  • An undergraduate degree
  • 7 to 8 courses in financial planning each with exams
  • 3 years of industry experience
  • A 10 hour Comprehensive exam to demonstrate mastery of all course material
  • A criminal background check
  • On going continuing education for life

In the martial arts community obtaining your black belt means you are now ready to begin your real training. Likewise in the financial planning industry, receiving your CFP designation means you are now prepared to begin the real journey in financial planning. This is why I feel that the CFP designation is the Black Belt of Financial Planning. An individual who achieves either of these accomplishments has demonstrated their focus and dedication to mastering the skills necessary to become an expert and their commitment to ongoing improvement. A black belt in martial arts provides you with the strength to help others, while a black belt in financial planning provides you with the knowledge to help others.

The Health-care Overhaul Bill’s Affect on Small Business Owners

Love it or hate it, we are moving to a new era in health-care which will begin to change the way company’s small and large address their employee’s benefits. These changes will begin to take affect over the next six months and continue to grow over the next several years.

So what can small business owners do now to prepare for these changes?

As with all changes that have an impact on a company’s bottom line you need to know what has changed. In order to do that you need to know your starting point. Here are a few steps business owners can do now to help them determine how the changes will impact their business.

  • Determine exactly what your ’07, ’08 and ’09 medical expenses were in total and for each employee
  • Who is covered by your plan and what options did they select (Single, Family, Dental, vision, etc..)
  • Age and lifestyle of your covered employees
  • What are your growth goals; adding headcount, reducing headcount or retaining current staffing level

Having this information handy while the health-care overhaul is implemented will help you to quickly determine what affect each change will have on your business and allow you to proactively maneuver your business through this changing environment.

I’ll leave you with a few thoughts that popped into my head while I was thinking about this post.

It will be interesting to see what the insurance industry’s short term reaction to this overhaul will be. As we just recently saw with the credit card industry, once the new regulations had passed, many if not all credit card companies raised their rates dramatically. It was common for credit card holders to see their rates go from around 5% to 20% or higher in the first two months of this year. So will we see the same reaction from the insurers? Did the recent hikes in California’s insurance rates give us a snapshot of things to come?

Lastly what will be the typical size of a small business? If the exemption threshold for mandatory coverage is set at 50 employees, will we see small businesses gravitate towards that number? Will we see larger companies splinter off into multiple separate standalone companies?

Just a few things to keep in mind over the coming months.

Entrepreneurial Spirit

Can Your Spouse Survive your Entrepreneurial Spirit?

Starting a business is an exciting adventure full of new challenges that many of us have never experienced before. For the entrepreneur it is often a liberating experience. Many people start their own business because they know they can do it better, faster, cheaper, or “Why hasn’t anyone ever thought of this?” An even more common time to start a new business venture is because they are unemployed at the time and feel it’s the perfect time to start the business they’ve always dreamed of. Whatever the reason for venturing off into the entrepreneurial world the result can be a very satisfy and rewarding one.

But what about your spouse?

Most spouses are very supportive when you first start your new venture (because if they weren’t you wouldn’t be starting anything). The beginning stages of a new venture are filled with a lot of positive energy, new ideas, new freedom, and the excitement of creating your own business. However, as with all new endeavors the initial excitement wears off and the money continues to flow out faster than was expected. Your new position as the family CFO (Cash Flow Out) begins to bother your spouse.

So what can you do to avoid or at least minimize the impact your Entrepreneurial spirit has on your family’s finances?

Whether you are just starting out or have been in business for a few years the following 6 steps can have a profound affect on your family’s finances.

1. Determine what your household expenses are

    Try to be as accurate as possible in determining what your monthly household expenses are. Make sure not to miss expenses that occur once a year such as; Insurance premiums, Birthday/Holiday gifts, family vacations, property taxes, etc…Add up all expenses for the year and divide that by 12 to determine your monthly expenditure.

    2. Determine your portion of the household expenses

      This is subjective based on your spouse’s income and job situation. So determine what the split should be to pay for household expenses (50/50, 25/75, 60/40, etc..)

      3. Calculate how long your current assets will support you

        Based on your portion of the household expenses and the amount of money you have set aside to start your company calculate how many months you can continue to meet all your financial obligations.

        4. Define a Quantifiable plan

          Set several financial milestones on your business calendar that will help you keep track of your progress. These milestones have to be measureable, for example monthly gross income of $1,000 after 3 months, $2,000 after 6 months, break even after 9 months and generating a salary of $1,000 after 12 months.

          5. Track and report your progress

            By far the most important step in this process is the tracking and reporting stage. First off you need to be able to determine if you are falling behind so that you can make changes early and quickly to reach your goals. Secondly you need to be able to show your spouse that yes in fact you are making progress. This will help to reduce the tension at home.

            6. Have a fall back plan

              If your business plan just isn’t working at all and you are not seeing the type of growth you need to make your business a viable one then you should have a plan to fall back on. Ideally know your fall back plan at the outset which will allow you to build your business in such a way that the skills you are learning and improving can be directly transferable to a new career path.

              These steps are straight forward but are often overlooked as the excitement of building a company dominates an entrepreneur’s time. There are many tools and advisors that can help an entrepreneur address these issues. A few keys to keep in mind when defining your process are:

              • Have someone review your plan that can provide you with unbiased feedback – whether this is a trusted family friend or a paid advisor, make sure they can be objective.
              • Make sure you understand the tool(s) you use – There are a lot of really good tools available but many of them try to be all things to everyone so make sure it’s the right tool and one that you fully understand.
              • If you do hire an advisor make sure you understand the advice they provide – There are professional advisors of all sorts out there and many love to use acronyms that people outside their field just don’t understand. So look for someone who knows their stuff and can explain it to you in a way that you can understand.
              • Get your spouse involved – this doesn’t mean she/he has to build the widgets with you but ask them their opinions, thoughts and suggestions. This will go along way to reducing tension within the household.

              Lastly make sure you enjoy the time. Starting a business is a process which should be enjoyed. Learn from your mistakes and improve yourself as you build your business.

              The Stimulus Bill and You!!

              The Stimulus Bill, or The American Recovery and Reinvestment Act of 2009, passed by the Senate and House earlier this year will have a significant impact on US households for several years to come. So how will it affect the average US household?

              The first thing we must understand is what data the New Administration is using to make its decisions. The findings in the report “Income, Poverty, and Health Insurance Coverage in the United States: 2007” which is the most recent data published, we find the following key bits of information:

              • The Real Median household income in 2007 was $50,233
              • The number of people living at or below the poverty rate in 2007 was 37.3 million people
              • The number of people without health insurance in 2007 was 45.7 million people

              These numbers are staggering which is why the Legislative Branch passed the Stimulus bill and the New Administration has proposed a $3.6 Trillion budget for FY2010.

              So to determine if you will be affected by the Stimulus Bill and the New Administration’s proposed tax-and-spending plans compare your financial situation with the data above.

              In short, as listed in the Wall Street Journal, the winners in the upcoming years:

              • Middle-class Families (<$250,000 household income)
              • Low-wage workers
              • Lower-income retirees
              • Veterans
              • Preschoolers
              • College Students
              • Homeless

              The big losers:

              • High-wage earners (>$250,000 household income)
              • Wall Street hedge-fund managers
              • Oil and Gas investors
              • Corporate executives
              • Well-to-do seniors
              • Washington lobbyists

              So what should you do?

              Be proactive!! Don’t sit back and let life happen, you need to sit down with your Financial Advisor and build a sound financial plan based on your current financial situation, career goals, family goals and retirement goals. Once you have defined your plan put it into action, do NOT try to time the market. If you have defined your goals realistically then you should be able to implement your strategy effectively to reach your goals in the shortest amount of time. Remember, your strategy is the long range plan you will still have to adjust your plan on a regular basis to take into account changes in your career and family lives as well as all the changes to the tax and investment regulations.