The Waiting Is the Hardest Part

Whether you call it the “fiscal cliff” or “taxmageddon,” the translation is the same. If Congress doesn’t act by the end of the year, taxes will rise and government spending will shrink. The current tax laws will expire, affecting both income and estate taxes beginning in 2013.

While we wait to see if and when Congress will extend any of the tax cuts, the debates are likely to escalate, especially with these automatic changes looming at the end of 2012:

  • Higher tax rates on personal income, dividends and capital gains for most taxpayers
  • An end to the payroll tax cut
  • Additional Medicare taxes for certain taxpayers
  • Estate and gift tax exemptions reduced from $5.12 million to $1 million
  • Cuts in defense and non-defense discretionary spending

These combined tax increases and spending cuts could reduce gross domestic product (GDP) by about $500 billion, or about 3.1% of the $16 trillion economy in 2013 if nothing changes. Although no one knows what Congress will do to address these issues, it’s wise to focus on what you can control and review your investment portfolio before the end of the year.

Most investors expect their taxes to rise over time regardless of what Congress does this year. The composition of possible tax increases, and their amounts, is uncertain. However, investors can prepare for uncertain but higher taxes – and be ready for potential year-end market volatility. In addition, preparing emotionally for the discord and debates may be as important as preparing your portfolio.

Working with your Edward Jones financial advisor and your tax advisor, consider a tax diversification strategy designed to ensure you own an appropriate mix of investments in a variety of accounts that are taxed differently. Evaluate the following solutions:

  • Fully funding tax-deferred investments such as IRAs, 401(k) plans and education savings plans
  • Roth IRA conversions, if appropriate, as well as contributions to a Roth IRA or Roth accounts under an employer plan
  • Tax-advantaged municipal bonds
  • Dividend-paying stocks with the potential for dividend increases
  • Reviewing common year-end transactions, such as whether to recognize certain gains or losses – and how much of each

Also make sure to talk with your financial, tax and legal advisors about potential impacts to estate tax strategies, including:

  • Credit shelter trust planning
  • Gifting during one’s lifetime
  • Charitable giving during one’s life or at death
  • Irrevocable life insurance trust (ILIT) planning

None of us can control what Congress will do, but you can control your financial decisions. If you’re worrying about a fiscal cliff, remember it’s not an economic cliff or a market cliff. You may need to focus more on your map – the directions designed to help guide you to your personal financial goals – and spend less time watching the scenery. Frequently, the worries about what can go wrong along the way are worse than the journey itself.

To discuss which strategies are right for you, contact your Edward Jones financial advisor.

Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate-planning attorney or qualified tax advisor regarding your situation.

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