BUFFALO, NY - In whatever fashion Congress and the President attempt to solve the impending "fiscal cliff", investment advisors say the impact will likely be steep...and that people of all means have to be prepared now more than ever.
Federal Reserve Chairman Ben Bernanke is largely credited with coining the phrase "fiscal cliff" last winter, when warning of a looming slowdown for the nation's economy, unless an alternative deficit-reduction deal can be reached between the President and lawmakers.
Without one, the result would be hundreds of billions of dollars in across-the-board spending cuts and $500 billion in tax increases for fiscal year 2013 alone, as several of the so-called "Bush Era" tax cuts will expire.
"That's a big deal, because if you look at the Bush tax cuts one of the biggest benefactors was the middle class," said Michael Lomas of The Financial Guys LLC.
According to the nonpartisan Tax Policy Center, the typical middle-class taxpayer would pay $2,000 more.
"However, there would be pain to everyone," warned Michael Curatolo, a financial advisor with Georgetown Capitol Group, as even those who earn the lowest fifth of all incomes would pay about $400 more, while the top percent could see a $121,000 jump in taxes.
Financial planners say in these uncertain times, there are two certain rules.
Rule number one is those folks in Washington will do what they will, and rule number two is ...you might not be able to do anything about rule number one.
Which means you have to look out for yourself.
Among the many Bush tax cuts due to expire, is one on capital gains. Therefore, if you hold individual stocks, it could be advantageous in certain cases to sell them.
"If you know you're going to need to sell something in the beginning of 2013, it definitely may be advantageous to push that forward to 2012," said Curatolo.
"Maybe raise some cash in your portfolio," suggested Lomas, for those invested in mutual funds. "If you have a 401k plan it's not a bad time to make sure you've got a little bit of that money in a money market account within the plan."
Lomas issued a cautionary remark regarding government bond investments.
"As interest rates go up, government bond pricing can get hurt and there's a lot of people out there worried about the stock market and worried about corporate bonds, and they're moving all these 401k assets into the government bond side of things and I think that's a big mistake."
Of course that assumes you have money to invest.
"Remember, there are two parts to the fiscal cliff... an increase in tax rates for everybody and a lot of government programs that aren't going to be funded, so there's going to be a lot of government jobs cut if we go over the fiscal cliff," said Lomas.
As Western New York is a place with a high concentration of government related jobs in particular, that scenario could have a devastating impact on the region's recovery.
"From an economic standpoint, if there are some people losing their jobs, that's going to have a negative effect to the economy," Lomas said.
As the political jockeying continues with no result in sight, both advisors say there's no clear cut area of specific impact for investors, so the average person can do nothing better than to prepare for anything.
"I can tell you it is more important than ever to be well diversified and to not make panicked whole sale decisions and changes," said Lomas.
"I think the best advice is be prepared," added Curatolo. "We're all going to be paying more in taxes... the dollar amount you really won't know until this thing gets resolved. Instead of saying the word 'panic' I would use the term 'buckle up', because it's going to be a bumpy, aggravating ride for investors."
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