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The 2012 Post-Election Agenda

From:

Bradford Lee, CIS
Registered Principal

Focal Point Financial, Inc.

Today’s post-election political landscape looks a lot like the pre-election political landscape–President Obama will be working with a Democratically controlled Senate, and a Republican-controlled House of Representatives for a minimum of two more years. The issues haven’t really changed, either. What has changed, though, is the amount of time left to deal with these issues. With little time to act, the stakes are high. Here’s a quick rundown of some of the big issues that need to be addressed.

Expiring tax provisions

With the “Bush tax cuts” (extended for an additional two years by legislation passed in 2010) set to sunset at the end of 2012, federal income tax rates are scheduled to jump up in 2013. We’ll go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). The maximum rate that applies to long-term capital gains will generally increase from 15% to 20%. And while the current lower long-term capital gain tax rates now apply to qualifying dividends, starting in 2013, dividends will once again be taxed as ordinary income.

Other breaks go away in 2013 as well:

  • The temporary 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax, in place for the last two years, is scheduled to expire at the end of 2012.
  • Estate and gift tax provisions will change significantly (reverting to 2001 rules). For example, the amount that can generally be excluded from estate and gift tax drops from $5.12 million in 2012 to $1 million in 2013, and the top tax rate increases from 35% to 55%.
  • Itemized deductions and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).
  • The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit all revert to old, lower limits and less generous rules.
  • Individuals will no longer be able to deduct student loan interest after the first 60 months of repayment.

Additionally, lower alternative minimum tax (AMT) exemption amounts (the AMT-related provisions actually expired at the end of 2011) mean that there will be a dramatic increase in the number of individuals subject to AMT when they file their 2012 federal income tax returns in 2013.

There seems to be a general willingness to extend many expiring provisions. The sticking point, however, has centered on whether lower tax rates and other tax breaks get extended for all, or only for individuals earning $200,000 or less (households earning $250,000 or less). Recent posturing has indicated that compromise might be achieved by extending the lower tax rates for all, but increasing tax revenue by limiting the deductions available to high-income households.

Automatic spending cuts, or “sequestration”

The failure of the deficit reduction supercommittee to reach agreement back in November 2011 automatically triggered $1.2 trillion in broad-based spending cuts over a multiyear period beginning in 2013 (the formal term for this is “automatic sequestration”). The cuts are to be split evenly between defense spending and nondefense spending, and are projected to equal about $109 billion in 2013 (Source: Office of Management and Budget, “OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-155),” September 14, 2012). Although Social Security, Medicaid, and Medicare benefits are exempt, and cuts to Medicare provider payments cannot be more than 2%, most discretionary programs including education, transportation, and energy programs will be subject to the automatic cuts.

As with the expiring tax breaks, new legislation is required to avoid the automatic cuts. But while it’s difficult to find anyone who believes that the across-the-board cuts are a good idea, there’s been no consensus on what to do. The challenge for political leaders will be to come up with a more palatable set of cost saving measures, or an alternate deficit reduction plan.

The debt ceiling

While it hasn’t received the same level of attention given to the expiring tax provisions and the automatic spending cuts, there’s another problem looming–the government is running out of money again. The federal government will likely hit its borrowing limit (currently set at approximately $16.4 trillion) sometime before the end of the year, although certain “extraordinary measures” can be implemented to allow the government to meet its obligations into early 2013. (Source: U.S. Department of the Treasury, Treasury Assistant Secretary for Financial Markets Matthew Rutherford November 2012 Quarterly Refunding Statement, October 31, 2012.)

It was a little over a year ago that the last debt ceiling impasse led to the creation of the deficit reduction supercommittee and, ultimately, the imposition of the automatic cuts described above. It remains to be seen whether a new debt ceiling increase is included as part of a larger agreement encompassing the expiring tax provisions and impending spending cuts, or whether it is debated on its own.

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Coupons, Coupons, Coupons!

This is a post about one of my Daughters and her recent venture into coupon shopping:

Hi Dad,

I know you’re interested in people saving money, so I thought I’d tell you about my Rainbow shopping trip today.  I attached a picture of everything I bought, with a list at the bottom.  Today is double coupon day at Rainbow.  You can double 5 coupons up to $1/ea with a purchase of $25 or more.

The full price for all those groceries without sale prices or coupons is $141.26. This is how I used to shop — very little regard for sales or coupons.

Factor in the sale price and the cost would be $101.00a savings of $40.26. This  also resulted in a $10 coupon good on my next order along with a free milk coupon good on the next order.

My price was $42.85 — a savings of $98.41 from full price and $58.15 from sale price.  I did it by matching items on sale with coupons and splitting it into 4 different transactions allowing me to double 20 coupons.  With the exception of the bananas, crackers, and muffin cup liners, everything I bought was on sale or had some sort of deal attached to it.  I also used the $10 coupon and free milk coupon right away, which was possible since I had 4 transactions.

I’ve spent the last 6 weeks building up our pantry and freezer which allows me to shop this way — just the sales.  I plan our menu one month at a time based on what we already have.  But, I do adjust it, if necessary,  based on what I may have bought.  For example, the cabbage will need to be eaten this week.  So, I’ll change one of our meals to incorporate it in.  But, I’ll only use what ingredients I have on hand, so no quick trips to the grocery store.

Here’s a picture of all my groceries:

Groceries 100109

Here’s the stuff I ended up getting for free:

  • 4 cans of Campbell soup
  • 1 gallon of whole milk
  • 3 frozen Healthy Choice meals
  • 2 packages of Yoplait Delights
  • Welch’s grape jelly
  • 1 lb of green split peas

Here’s the complete list of what I bought:

  • 2 gallons whole milk
  • 4 Tombstone frozen pizzas
  • 2 Pop tarts (12ct)
  • 2 Cheerios
  • 1 Lucky Charms
  • 1 Reese’s Puffs
  • 1 Cocoa Puffs
  • 1 Cinnamon Toast Crunch
  • 1 muffin cup liner
  • 8 Yoplait yogurt
  • 3 Yoplait Whips
  • 2 Yoplait Delights (4ct)
  • Welch’s grape jelly
  • 3 Land O Lakes Butter w/Olive Oil
  • 4 Campbell Soup (Cream of Broccoli; Broccoli Cheese; 2 Beef Consommés)
  • Saltines
  • 4 Healthy Choice Fresh Mixers
  • 3 Healthy Choice frozen meals
  • Dawn (19oz !!)
  • 2 Speed Stick deodorant
  • 2.25 lbs banana
  • 2.25 lb cabbage
  • 1 lb green split peas
  • 10 lb bone in ham (this will be 3 meals for us: ham/cabbage/potatoes; creamed ham on toast; split pea soup)

Well, this it for my Rainbow shopping trip!

Georgette

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