Five Post ‘Fiscal Cliff’ Facts to Consider

Posted on January 2, 2013 at 1:08 PM PDT by

In the final hours, right up to the deadline (naturally), we got a vote out of the House. America won’t plunge over the so-called “fiscal cliff.” Taxes will go up on some of the wealthiest but also across the board on everybody else, thanks to the expiring break on Social Security withholding.

We punted on the spending cuts — for now. The market seems to be celebrating — for now.

Does any of this matter? As I have argued recently, not in the least. But here are five post “fiscal cliff” facts to remember in the coming weeks:

1) Nothing about how Congress works has changed. If you expected a rational bill with equal parts tax increases and spending cuts, you don’t know Congress, do you? The final bill included extensions of corporate tax breaks worth a reported $77 billion. Among them: A deal that helps NASCAR tracks depreciate their investments faster. Tax benefits for Puerto Rican rum. Breaks for movie producers. And so on.

2) We’re already up against the debt ceiling — again. This latest round of brinkmanship is not the end of it, hardly. The House GOP was dragged kicking and screaming to the table by a loudly ticking clock, one somewhat amplified by the media, but it’s just one clock in a room full of them.

3) We didn’t dodge the massive spending cuts ahead. We just put them off for two months. We get to do this all over again in the new Congress.

4) The $24 billion in cuts and tax increases in the Senate bill is a literal drop in the bucket when the country owes $16.4 trillion. In fact, the Congressional Budget Office figures the cliff deal adds almost $4 trillion to the debt over a decade. A sobering thought.

5)  The paychecks of millions of voters are about to shrink. The deal allowed a temporary cut in the Social Security tax to expire, so withholding will rise to 6.2% from 4.2%. Experts figure taxpayers are out $115 billion in 2013 as a result, money which will go toward shoring up Social Security. What’s less clear is how loudly wage earners will howl once they realize their pay has shrunk overnight.

The serious retirement investor should keep all of this in perspective. A 230-point rally out of the gate in the Dow was impressive in the sense that it was vertical, but the fact remains that the market rose less than 2% on the news by midday. It closed up 2.35%.

Stocks could retrench tomorrow. Nobody should be investing on or around headlines out of Washington, D.C.

The fix in the Alternative Minimum Tax (AMT) is probably the biggest “real” news in this bill. For retirement savers in the middle income to low six-figures range, this is a very important change. The AMT is now indexed to inflation, reducing the risk of suddenly higher taxes on those folks.

The other notable news for savers is that the Congress expects to raise some money in the short term byallowing more people to convert 4o1(k) savings into Roth IRAs.

Details on this are sketchy, but if you’re concerned about future taxes, a Roth is generally a good way to build wealth that will be tax-free in retirement, presuming you can pay the taxes due on the conversion today.

Tax ‘the other guy’

As for the rich, taxes have been higher and they have been lower. You will hear a lot of complaining about the rise in rates from the higher-income folks.

In fact, get ready for a lot of complaining from everyone who pays taxes, period. We all love taxes other people pay, but when you owe this much money as a nation, “the other guy” is all of us. This is a fact that the politicians would prefer to ignore for now.

Nevertheless, getting this compromise out of the way at least helps tax planners begin their work, with the IRS deadlines just a few months away.

Dow rally aside, the bottom line for investors is, “to be continued…”

It’s not a satisfactory ending to the fiscal cliff story, but at least we can turn the page and start into 2013 with a bit less drama and, one hopes, a clearer understanding of what’s to come.

Unless growth suddenly accelerates and tax receipts rise with it, “what’s to come” is more compromise.