5 Ways to Prepare Your Finances for the ‘Fiscal Cliff’
CREDIT: Cliff image via Shutterstock
While reports are now surfacing that a deal between President Barack Obama and Congress to avoid a fall off the fiscal cliff may be in reach, each passing day that an agreement isn't reached brings consumers closer to a number of financial uncertainties. From higher taxes to cuts in spending, the full potential ramifications are still unknown. With uncertainty swirling, here is advice from several financial experts on how consumers should handle the situation.
Don't be afraid
While the repercussions from a fall off the fiscal cliff sound scary, fear shouldn't dictate anyone's financial moves, said Chuck Fulkerson, a U.S. markets expert and instructor development manager for Online Training Academy.
Fulkerson said he is telling his students to stick with their financial plan while also educating themselves more on the state of the economy and money management.
"Don't let your fear of the fiscal cliff drive your financial decisions. When emotions get involved, you make emotional decisions, not rational ones," Fulkerson told BusinessNewsDaily. "The more you know about what is going on, both in our economy and the markets, the more educated your financial plan will be."
James Poe, founder of Texas Retirement Specialists, said consumers should consider holding off on large purchases until the tax situation becomes clearer.
Since taxes will be higher should an agreement not be reached, consumers will have to base calculations regarding large purchases, such as a car or house, on the tax situation as it could be in 2013 — not as it was this year, Poe said.
"If you don't own a business where you can write off purchases, I would be very, very cautious about taking on new financial obligations until there is much, much more known about how sharp and how deep the cliff will be," he said.
With higher taxes a certainty for anyone who pays federal income taxes if a deal isn't reached, Charles J. Read, Jr., president of Custom Payroll Associates, believes employees should take proactive steps to ensure they aren't shocked by their tax bill next year.
"Take a look at your W-4 form and consider increasing your withholding so you won’t be surprised when additional income tax is due," Read said.
To be fully prepared, he also advises consumers to check with a tax adviser on whether the new tax rates qualify them for the Alternative Minimum Tax, which is projected to cost the average middle class family an additional $4,000 a year in taxes.
Personal finance educator Kate Horrell is telling her clients to quickly increase contributions to any retirement accounts they have before the end of the year.
"It would be smart to max out post-tax retirement accounts for 2012," Horrell said. "If taxes do increase dramatically, 2012 contributions will be less expensive than 2013 contributions."
Take profits now
Consumers should look ahead to whether they plan to make any big purchases, such as a house, in the coming years, said Mary Kelly, CEO of Productive Leaders.
She advises consumers take profits from investments now if they think they'll need that money as cash in the next few years.
"For example, if you are looking to buy a home in two or three years and you have held some investments for a few years, cash out now so that you are not hit by the higher capital gains taxes in 2013 and beyond," Kelly said.