Put money aside for your retirement and to protect yourself against a downturn in the economy!

By Jeffrey Brooks, CPA Jeff Brooks is the President of JBrooks Wealth Advisors PC. a CPA and CFP firm

In my opinion, this debt crisis needs to be a wake up call to start saving more money and investing more of your time to FOCUS on tax planning to increase your wealth and put “nuts” away for future economic problems. The Congressional Budget Office reports are very useful to understand what is probably going to happen in the future. They put a lot of time and money into their reports. Please read this summary and I would be interested in hearing your comments.

A new Congressional Budget Office (CBO) report paints a sobering picture of the dilemma facing Washington policymakers: retain the fiscal restraint provisions (including big tax increases) that are scheduled for 2013 and risk a recession next year; or remove the fiscal restraint provisions and risk runaway increases in the long-term federal debt. The CBO report suggests a compromise between the two courses of action and implicitly urges quick, bipartisan action to prevent the erosion of public trust.
What are current law’s “fiscal restraint” measures? These measures refer to the host of tax changes scheduled to take effect next year, along with other nontax policy changes, that according to CBO will reduce federal spending between fiscal years 2012 and 2013 by $607 billion (excluding any feedback from their impact on the economy). About two-thirds of that effect (or $399 billion) stems from the following scheduled changes in tax policies:
• Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, P.L. 111-312) changes that limited the reach of the alternative minimum tax (AMT) expired on Dec. 31, 2011. Also set to expire on Dec. 31, 2012, are other 2010 Tax Relief Act provisions that extended the lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27), and the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5).
• The 2-percentage-point cut in the payroll tax that first went into effect in January 2011, and was extended by the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96), will expire on Dec. 31, 2012.
• Various other provisions affecting the Code are also slated to expire by the end of this year or expired at the end of 2011. The largest such provision involves the expiration at the end of 2012 of 50% bonus first-year depreciation.
• Some tax provisions of the health care reform legislation (Affordable Care Act, P.L. 111-148 and P.L. 111-152) are scheduled to take effect in January 2013. These include an additional 0.9% hospital insurance (HI) tax for higher income wage earners and self-employeds, and a 3.8% unearned income Medicare contributions tax on net investment income.
Nontax fiscal restraint provisions scheduled to take effect are: automatic custs to discretionary and mandatory spending under the Budget Control Act of 2011; expiration of extended emergency unemployment benefits; and the scheduled reduction in Medicare’s payment rates for physicians.
Economic effect of leaving current law’s “fiscal restraint” measures in place. CBO says that if left unchanged, the fiscal restraint provisions will dampen economic growth in the second half of 2012: individuals will restrain spending in anticipation of higher rates; businesses will hold off on investment and hiring because of an anticipated weakening in the economy; and government agencies will restrain spending in anticipation of cuts. Although quantifying those anticipatory effects is difficult, CBO estimates that they will reduce the growth of real gross domestic product (GDP) by about 0.5 percentage points at an annual rate in the second half of 2012. Real GDP will increase by just 0.5% next year, a contraction that would probably be deemed to be a recession.
Economic effect of removing or reducing current law’s “fiscal restraint” measures. CBO concludes that eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income. If all current policies were extended for a prolonged period, federal debt held by the public—currently about 70% of GDP, its highest mark since 1950—would continue to rise much faster than GDP. Such a path for federal debt could not be sustained indefinitely, CBO says, and policy changes would be required at some point. The more that debt increased before policies were changed, the greater would be the negative consequences—for the nation’s future output and income, for the burden imposed by interest payments on the federal debt, for policymakers’ ability to use tax and spending policies to respond to unexpected challenges, and for the likelihood of a sudden fiscal crisis. And the longer necessary adjustments were delayed, the more uncertain individuals and businesses would be about future government policies, and the more drastic the ultimate changes in policy would need to be.
Charting a middle ground. CBO says an intermediate possibility is for policymakers to extend some but not all current policies indefinitely (perhaps with some offsetting changes in other policies), or to extend or enact certain policies for a limited period. In particular, to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, policymakers could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law, but that would reduce deficits later on relative to what would occur if current policies were extended for a prolonged period.
Call for bipartisanship and quick action. CBO says such an intermediate approach to fiscal policy would work best if it was “sufficiently specific and widely supported” so that individuals, businesses, state and local governments, and investors believed that the future fiscal restraint would truly take effect. Also, if such policy changes were enacted “soon,” they would tend to boost output and employment in the next few years by holding down interest rates and by reducing uncertainty and enhancing business and consumer confidence.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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