Fiscal Cliff: Laurie Weston Luncheon - by Craig Fuhrmann, CFA

On November 14, 2012 the CFA Society of Milwaukee welcomed Laurie Weston, CPA, tax Manager at Wipfli LLP, to discuss the expiration of the Bush tax cuts and the implementation of new health care taxes. The majority of time was devoted to a legislative outlook and changes affecting taxes on individuals. Some of the content was detailed and more relevant to those in the audience that implement tax management strategies, yet there were also more general takeaways for those less involved in tax planning. Key points from the discussion are summarized below.

One of the larger messages on the legislative front was that a similar cast in Washington, post elections, likely means gridlock will continue. If the election had resulted in Romney win, significant tax legislation updates would have likely come no sooner than February of 2013. With Obama winning, each party may dig in its heels even more and delay that timeline. Both parties have commented on desires to simplify the tax code, but based on Laurie’s expectations, these hopes can be put to rest because lobbyist will get involved and insist on exceptions. We should expect last-minute tax bills, temporary patches, and more “unreasonable complexity”.

For the individual, the looming changes to the tax code could result in sizable tax increases. Without an extension of the Bush cuts, income taxes will increase 9% to 13% depending on income level. The 2% reduction in FICA taxes will expire and the marriage penalty will return. Investment income will also be harder hit with the preferential 15% capital gains rate reverting to 20% and the dividend rates for the highest bracket filers increasing from 15% to 43.4% (189%!). Implementation of the Affordable Care Act will also affect those in the higher two brackets, causing a 0.9% rate increase on incomes and a 3.8% increase on long-term capital gains, dividends, and certain other investment interests.

These and other changes have turned traditional planning on its head. For example, it is typically advantageous to defer paying taxes in part due to the time value of money. However, in the current environment it may now make sense to realize gains in the 2012 calendar year rather than deferring. An audience member asked about implementing Roth IRA conversions in 2012 and Laurie confirmed that doing so might be a good idea for many individuals.