LITTLE ROCK — The “fiscal cliff” has made year-end financial planning especially daunting this year.
Uncertainty, the saying goes, breeds uncertainty. And it’s up in the air as to whether Congress will take action to head off the significant reduction in federal government spending and the expirationof Bush-era tax cuts that are scheduled to take effect Jan. 1 and have become known as the fiscal cliff. Nor is there any clarity on what Congress might decide on as an alternative.
“We’re right in this noman’s land,” said Frank Smith, a Raleigh, N.C., financial planner.
Nevertheless, many - but not all - investment advisers counsel that the prospect of the nation possibly going over the fiscal cliff isn’t cause for overhauling a sound investment portfolio.
“Take a long view. This is something that will pass,” said Chip Hymiller, a principal at Beacon Financial Strategies, a financial planning and investment firm in Raleigh. “A long-term investment strategy shouldn’t be influenced by shorter-term issues like this. This is going to be solved at some point, and life will go on.
“Usually, the market’s decline is the result of some sort of surprise. This is definitely not a surprise.”
To be sure, many experts advise there are some steps investors should be examining given the likelihood of higher taxes next year - regardless of whether Congress reaches a compromise that somehow resolves the fiscal cliff.
But here’s the caveat: It’s important to consult an investment or tax adviser first.
“This is very complicated,” said Kathy Kraeblen, a Raleigh based senior wealth planner with PNC Wealth Management. “There is no cookie-cutter approach to financial management. Everyone’s situation is different.”
Moreover, the prospects of higher taxes next year has transformed the landscape.
“Throw out all of the typical year-end planning strategies that we’ve had in the past,” said Melissa Labant, tax director at the American Institute of Certified Public Accountants. “Throw them out the door.”
For example, a typical yearend tax maneuver would be to sell off losers in your investment portfolio.
“Hold off this year,” Labant said. “Don’t run out and trigger capital losses to offset capital gains or ordinary income,” given that this year’s tax rates on both capital gains and ordinary income are likely to look like a bargain compared with the rates that take effect in 2013.
“I’m concerned that a lot of taxpayers are in the habit of taking certain year-end planning steps every year and that they’re automatically going to do the same thing this year,” Labant said. “That would be their biggest mistake.” Labant is based in the Washington, D.C., office of the CPA organization.
What makes the current situation tricky is that people have until Dec. 31 to address tax matters that may not be resolved before the end of the year.
Although Congress conceivably could end up extending certain deadlines for taxpayers, “it’s unlikely and I wouldn’t rely on it,” Labant said. “If you want to make changes [for your 2012 taxes], you should plan on taking those actions by Dec. 31.”
Investors are looking to make the best of the situation.
David Wright, owner of Capital Insurance and Financial Services in Raleigh, said his clients “understand that they are going to be paying more tax, but they want to make sure they are doing everything possible to limit the impact that the new tax rates are going to have on them.”
Business, Pages 25 on 12/25/2012