There are three weeks left in the year and the world won’t be coming to an end, literally or figuratively, regardless of what the various doomsday prognosticators have to say. It’s impossible to turn on the television or open a newspaper without being assaulted with dire warnings about the impending disaster that is the “Fiscal Cliff”. It’s gotten to the point where I can only watch CNBC is when it’s on mute.
For those of you who’ve been living under a rock, the Cliff is the December 31st deadline after which substantial tax increases and mandatory spending cuts will take effect. The tax increases are largely from legislation passed by President Obama to pay for his health care program along with the end of the Bush tax cuts. The spending cuts were mandated during the last failed deficit negotiations. It’s been estimated that should all of these tax increases and spending cuts come to pass, it will shave 4%-5% from GDP growth, sending the country into a deep recession.
While I’m growing more and more angry and frustrated (if that’s even possible) at the intransigence emanating from both parties in Washington, I honestly don’t think the looming fiscal cliff is really the nightmare everyone is saying it will be. It is HIGHLY UNLIKELY that every tax increase and spending cut will, in fact, come to pass. Some compromises will certainly be made by our leaders in Washington, despite the radical bleatings of the far right and far left.
Whether the deal is brokered in the next two weeks or the next two months, I’m confident a deal will be made that will leave both sides less than happy but will stave off the worst result, which would be simply doing nothing. It is truly in the best interests of everyone, other than perhaps that fiscal terrorist Grover Norquist, to get a deal done. There is simply too much self-interest in Washington, especially in the House of Representatives, where they must stand for re-election every two years, to allow a fiscal calamity to happen on their watch. That’s a great way to get thrown out of office by a pissed off electorate.
So if we’re able to drown out the noise about the cliff, what should you be truly focused on between now and the end of the year? Given all of the current uncertainly, there are no simple answers, but here are a few suggestions for you to ponder:
- If you have large unrealized gains, consider realizing some of them this year to take advantage of the low capital gains tax rate, which is likely to rise next year.
- If future capital gains taxes aren’t really an issue, don’t forget to match gains with losses where possible to minimize your tax bill this year.
- Check your portfolio to see if your holdings need to be re-balanced. Avoid having any one position be too large a percentage of your overall holdings. I generally like using 10% as a maximum position size. Similarly, either add to, or get rid of, positions that are simply too small to make a difference.
- If you have a large estate, consider making gifts of up to $5.1 million before year-end to take advantage of the large estate tax credit that expires this year. Unless a compromise is reached, it reverts back to $1 million next year.
- Speak with your adviser to make sure your investments are suitable for your financial objectives and risk tolerances. Times and conditions often change, and our investment approaches sometimes must change as well.
- If you don’t have a will; write one. If you have a will, but haven’t updated it in more than five years, it’s probably time to look at it again.
- If you haven’t already done so, consider giving some of your time and/or money to a worthwhile charity. There are so many organizations out there that desperately need your help, especially during the holidays. So open your heart and your wallet and make a difference for those in need.