If you follow the stock market and politics, you may have heard of the "fiscal cliff" issue coming up at the end of 2012. What's this "fiscal cliff?" As reported by Kimberly Amadeo, Guide to the U.S. Economy, in "Falling Off the Fiscal Cliff," the fiscal cliff includes three tax issues that will change effective January 1, 2013, unless Congress and the President agree to continue them. The issues are (1) the Bush-era tax cuts, which were first set in 2001 and have been extended over the past 10 years, are set to expire December 31, 2012; (2) the 2% payroll tax cut for employees and self-employed individuals, which is also set to expire; and (3) extended unemployment benefits, which are also set to expire.
The worry among some analysts is that if these cuts are not continued, the result could be another recession (read Kim's article for more details). On the other side of the issue, continuing these cuts could increase the U.S. debt. Lots of political posturing going on now when a lame duck Congress will try to grapple with these issues. As Kay Bell of "Don't Mess with Taxes" notes, Congress only has a few days in November and December to do anything. They may, like the end of 2011, extend the payroll tax cuts for a few months until they can deal with the issue after they return in January.
What does the "Fiscal Cliff" mean for your business?
As noted by the Forbes recently, if the tax cuts are left to expire December 31:
- Taxes on dividends would increase, including shareholder dividends for small businesses
- Investment and hiring would be "restrained," and
- Taxes on small business income would increase with an increase in taxes on personal income (since most small business income is taxed at the personal rate).
As I mentioned, a combination of spending cuts and tax increases is likely, but what will happen before December 31 is uncertain. In any case, if taxes increase in 2013, you may want to consider timing income and expenses to minimize your tax bill. Be sure to talk to your tax advisor before making any decisions.
More information on post-election taxes by William Perez, Guide to Tax Planning.