As the U.S. government comes closer to falling over the "fiscal cliff" and ushering in a slew of budget cuts and tax hikes next year, some analysts predict the economy will slide back into recession.
Las Vegas Valley residents should be aware of several changes that could affect such things as Medicare and stock holdings if federal lawmakers fail to reach a deal.
The deadline is Dec. 31. A number of tax code provisions are slated to expire that day, including many tax cuts approved roughly a decade ago under President George W. Bush. Combined with that, $109 billion in spending cuts are scheduled to kick in starting Jan. 2.
Half of the cuts, $54.7 billion, would be lopped off the defense budget. Another $11.1 billion would come from Medicare, with the remaining $43.6 billion from other government services.
Congress can avert the cuts and tax expirations with a new budget package. Negotiations have shown a few signs of progress, but there's no guarantee hyper-partisan Washington can reach a deal.
President Barack Obama wants to raise taxes on people who earn at least $400,000 a year as part of his goal to raise at least $1.2 trillion in revenue. The Democrat is negotiating with Republican House Speaker John Boehner, who after strongly opposing all tax hikes, has proposed raising rates on people who earn at least $1 million. Boehner, of Ohio, hopes to generate $1 trillion in new tax revenue.
But even if the leaders reach agreement, they still must persuade both houses of Congress to approve the deal.
If the country ends up falling over the cliff, the impact is unlikely to be felt right away. Nevertheless, here are a few things to watch out for:
Taxes, Rent and Retail
Next year's income tax rates are subject to change, but analysts say they are sure to be higher than 2012's. If no deal is reached, taxes would rise by $2,200 for the typical middle-class family of four, according to the White House.
That is a few months' rent or several mortgage payments for many Las Vegas families, many of whom are still out of work and reeling from the recession.
With less money in people's pockets, sales would tumble at clothing stores, restaurants and other retailers. U.S. consumers could cut their spending by almost $200 billion next year because of the tax hikes, the president's Council of Economic Advisers predicts.
Americans would spend $15 billion less on groceries, $11 billion less on restaurants, $7 billion less on cars and auto parts, and $32 billion less on health care.
Stock market investors could see taxes on earnings go up next year.
Capital gains taxes are expected to rise from a maximum of 15 percent to as high as 20 percent if lawmakers remain deadlocked, according to the Tax Foundation, a Washington, D.C., think tank.
Taxes on payouts from utility and other stocks also could jump if no deal is reached. Many investors own shares in Las Vegas utilities Southwest Gas Corp. and NV Energy because the companies pay dividends. The dividend tax is expected to rise from 15 percent to as high as 39.6 percent, Las Vegas accountant Rick Gilmore said.
Some financial advisers are telling clients to "accelerate" their income this year and earn as much money as possible to secure current lower tax rates. They're also telling clients to defer expenses until 2013 so they can pile up write-offs in a year when, thanks to the higher tax rates, they'll have less income.
Strategies this year could include selling stocks that have climbed in value, said Bruce Gardiner, a partner with Las Vegas accounting firm Swan and Gardiner.
Companies could see their ability to write off equipment purchases drastically reduced next year if lawmakers remain at loggerheads.
Business owners this year can immediately write off $139,000 for an equipment purchase. That's down from $500,000 in 2011, though it will fall to $25,000 next year, Gardiner said.
For instance, if you bought a $250,000 piece of machinery this year, you could write off $139,000 and depreciate half of the remaining $111,000 this year, giving you another $55,500 write off, he said.
In 2013, the write-off limit will drop and the so-called bonus depreciation will vanish, he said.
"These laws are going to kill our economy," Gardiner said.
Wealthy people can pass on estates of about $5 million this year without paying gift or estate taxes. If Congress fails to reach a deal, that threshold could drop to $1 million, Gilmore said.
This year, if you pass on an inheritance that's valued at more than $5 million, the estate tax is 35 percent. Next year, anything valued more than $1 million will be taxed at 55 percent, Gilmore said.
There are fears that the widely used 401(k) retirement plan could lose its tax-free component as lawmakers look to boost revenue.
Popular in the private sector, 401(k)s let U.S. workers sock away funds and defer paying taxes on them. But budget reformers have targeted the savings plan over the years.
If the government forced workers to pay taxes on the earnings they put in their 401(k)s, in 2014 alone, the United States would collect about $163 billion, Politico reported.
Distributed by MCT Information Services
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