Evelyn Jacks: “Fiscal cliff” has immediate implications

The U.S. is fast approaching its “fiscal cliff” and how it resolves that challenge has implications for Canada and the world.

At midnight on Dec. 31, 2012, unless President Obama and the Republican-held House of Representatives reach an agreement, several tax cuts will be rolled back and Americans of all descriptions will face higher taxes. The 2% temporary payroll tax cut will disappear, as will tax breaks for businesses and the middle class. Calculations under the Alternative Minimum Tax (AMT) will change. Just as devastating, 1,000 government programs will experience spending cuts.

A jump off the fiscal cliff would cut the U.S.’s US$16-trillion deficit in half but it could also push the U.S. economy into recession. Half measures, on the other hand, could stave off a recession but would increase the deficit and extend the economic pain.

The governor of the Bank of Canada, Mark Carney, in a Nov. 8 speech to the Canadian Club in Montreal, called this a “big” and “almost immediate risk,” one in which “the impact would begin on Jan. 1 if there’s no movement among American authorities.” He also noted: “The hardest-hit areas of the Canadian economy would be exports and business investments."

What can Canadians do to prepare for the fiscal cliff? From the vantage point of considering this newest financial challenge with 150 tax and financial advisors from across Canada at the Distinguished Advisor Conference this week, one proactive and positive solution would be to spend more time with these professionals before yearend.

Although it is hard for individuals to affect the choices of policy makers directly as they navigate through these uncharted financial waters, there is much we can do to preserve and grow wealth despite the times. This includes keeping a vigilant eye on tax erosion and the cost of fees and hedging against future inflation or interest rate hikes with proper debt management.

It’s Your Money. Your Life. Jumping off a fiscal cliff without a plan for a soft landing is never wise. Your Real Wealth Managers — designated specialists who have the skills to plan your investments, retirement and succession to the next generation — can help.

Best-selling tax author Evelyn Jacks is founder and president of Knowledge Bureau and program director for the Distinguished Advisor Conference which will celebrate its 10th year in 2013 in beautiful Ojai, California. Follow her on Twitter @evelynjacks.