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Commentary: What the fiscal cliff means to O.C. taxpayers

December 10, 2012|By J. Brian W. Horn

There has been much hand-wringing over the "fiscal cliff" in the media lately, but very little about what protective measures citizens can take should we end up diving off the cliff head-first. For those of us who are not ready to repatriate it's time to have some open, honest conversation about what the cliff really means.

The cliff we face is so coined because it is the drop-off point at which a powerful combination of the expiration of the Bush tax cuts plus a series of deep automatic spending cuts to social programs and the defense budget will take place if Congress fails, once again, to come up with a better solution.

The latter consequence was enacted in 2011 after the failure of the 111th Congress to pass a federal budget and therefore stands as a compromise to resolve the dispute concerning the public debt ceiling. Essentially, Congress has a simple choice: come up with a workable solution to the deficit and budget crisis or the fiscal cliff will roll in and increase taxes while hacking away at spending with no regard to the consequences. As is their modus operandi, Congress has left difficult policy-making to the final hour. So what will happen to the average Orange County citizen if their procrastination leads us over the cliff?

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According to the Congressional Budget office, the tax and spending cuts will almost inevitably contract the economy by -0.5%. This contraction has been hyperbolically compared to Greece's economic troubles. Our scenario would be unlikely to reach these lows, but it may indeed cause a second recession to which few will be immune. In turn, this will continue the cycle of fear that has prevented most average investors from participating in the markets' recent upturn.

Tax consequences of the cliff will likely affect O.C. residents the most. Most talk lately has focused on the Alternative Minimum Tax capital gains hikes — and they certainly should be publicized as they will affect most U.S. citizens.

However, the change in estate and gift taxes has been largely overlooked. Should Congress fail to come up with a solution, gift and estate tax exemptions will drop from $5.12 million per person with a tax of 35% on the excess to $1 million per person with a tax of 55% on the excess.

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