Now that the elections are over and the dust has settled, the reality of the fiscal cliff remains. Is this just Washington hype, or is it for real? In my humble opinion, it's real. I do believe that a compromise will be worked out in the end, but there will still be some lasting effects.If you aren't familiar with the cliff, here's a very watered down summary. In 2011, Congress passed the Budget Control Act of 2011, which was their way of compromising at the time over the debt ceiling. Based on the 2011 act, the debt ceiling would be increased, but if further agreement wasn't reached by Dec. 23, 2012, then certain tax and spending changes would automatically go into effect.Fast forward to now, and U.S. lawmakers have three choices. They can let the policy take effect for 2013, which means that tax rates will increase, and very heavy spending cuts will hit over 1,000 government programs such as the national defense, Medicare and other programs, but would help reduce the deficit. They could cancel some of the tax increases and spending cuts, but this will increase our deficit. Or, the third option is obviously a compromise between the two where some taxes are increased and some spending is cut.On top of these issues, slightly less prominent are the issues surrounding the Alternative Minimum Tax and many tax deductions that technically expired at the end of 2011, such as the educator expense deduction for teachers and the sales & local tax deduction. If Congress doesn't also extend these tax savings measures, 29 million more households will be paying additional taxes. I ran the numbers for one family of four with annual income of about $200,000 and if these changes are not agreed upon by the end of this year, they will owe $12,000 in additional income taxes as a result of the AMT.Now for the real kicker. Perhaps the biggest issue of all to most of this is the IRS side of things. Since all these potential changes affect the tax return, the IRS is starting to say they need answers sooner than later. They issued a statement last week that if decisions aren't made by Dec. 31, then their systems won't be ready to accept tax returns until late March or later, and refunds would be slower than usual as well. There is even talk of changing the tax due date, which has been April 15 since 1955, to a later date. It's not quite time to use this as an excuse for procrastination, but it's definitely time to keep close tabs on the news so that you can be prepared for whatever's coming. Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit www.cpamichele.com.
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