Walking Off the "Cliff"

With all this talk about a "Fiscal Cliff", I'm sure many of you are wondering exactly what this might be all about.  Given the attention its garnered in the news recently, I thought it appropriate to discuss it and its potential impacts on the market.

So what is the fiscal cliff?  In short, it' a confluence of expiring tax reductions and government spending that when combined together could create enough of an impact to potentially send the US back into a recession.  In a little more detail, it is composed of the following:

1.) Income taxes will go up
2.) The capital gains tax rate will increase to 20%
3.) Dividend income will be taxed as normal income
4.) The estate tax will revert to a top tax rate of 55% with an exemption amount of $1 million
5.) The payroll tax cuts expire
6.) Automatic defense spending cuts kick in January 1st
7.) The US federal debt ceiling will need to be increased
8.) Other miscellaneous tax cuts will expire

So what does this mean to me?  Well, in the short run, expect your taxes to increase slightly (probably around 2%).  The sad thing about this is that the 2% increase coupled with about a 3% increase in the inflation rate means that if you don't get at least a 5% raise this year, then you will not be taking home as much money as you did the year before.  The other issues pretty much only involve you if your company has some connection with the federal government or if you trade a significant amount of money in stocks or other dividend related incomes. 

With that sad, not all is bad.  No politician wants this whole thing to erupt into a deep recession on their watch, so I suspect that many of them will put together some sort of comprise on the issues.  However, expect the markets to fluctuate significantly over the next month or two.  For long term investors like ourselves, this probably won't mean too much, but if you have some cash on the sidelines, it will definitely be a good time to buy some great stocks or mutual funds at bargain prices. 

Nobody is looking forward to another recession, but keep your eyes out for the diamonds in the rough.

Wonderful Moment of the Day: Turtle Truffle Pie!