Dec 12 Bar Tax Bull: Fiscal Cliff?

1)  The Fiscal Cliff

2) Tax Rates or Deductions

3) Sandy and IRS

1). I woke in the middle of the night after dreaming that I was back at Rutgers in the 60s. As an undergraduate I was required to take a course called the “Geography and Geology of New Jersey”. Professors organized bus trips to interesting geological sites in our fair state. In my dream, I missed the bus. But in an instant I was conveyed to the beautiful Cliffs of Moher in Ireland. I could feel the sea spray in my face looking down from the Emerald Isle's most intriguing geological viewpoint into the sea. The next morning I searched for deep meaning to the dream. Of course, staring at the New York Times brought it all home. The Fiscal Cliff. This bit of congressional irresponsibility has led the country to the brink of another recession or worse, with automatic tax hikes, budget and entitlement cuts and a return to Prohibition. Okay, that last part's not true. But close. The Fed has warned of an economic disaster. Little old ladies are selling their stock before the fiscal cliff’s tsunami wave hits. Where did this cliff come from? Now the geology lesson: The world's highest cliff is Nanga Parbat (Naked Mountain) in Pakistan. The mountain itself is 26,660 feet to the summit and is the 9^th highest mountain in the world. Its cliff is known as the “Rupal Face” and is almost two miles high. I yanked out my Rutgers geology and geography book and searched for a scientific explanation for cliffs. I found it. “Cliffs are formed due to the process of erosion and weathering”. I realized then that the Fiscal Cliff has a lot in common with Nanga Parbat. Nature’s work requires millions of years. Our Congress has managed to create its cliff in less than four years, but it too is the product of erosion and weathering. Instead of making decisions which benefit the country, politicians have taken silly pledges ( honestly ,would you swear to a pledge by a guy named "Grover"?) and have simply avoided fiscal reality. There is another coincidence looking at real life cliffs, some of the most spectacular in the world include Ronda in Spain, Positano in Italy and Santorini in Greece. All of these countries are also finding themselves behind the fiscal eight ball.

2). At the time of this writing, Republicans and Democrats continue to try to position and control tax damage to their respective constituents. The president argues that tax rates must go up on income above $500,000 a year because reducing tax deductions alone on the rich cannot raise the $1.6 trillion he seeks. Congressional Republicans on the other hand, argue that they will not accept tax rate increases but may be willing to hear a reduction of tax breaks. In order to accomplish that sleight of hand a very bitter pill is in the offing. The kinds of tax deductions which would be yanked from the tax code would have to include perhaps all mortgage interest, charitable and medical deductions. Many of these are often claimed by the middle class. At best a cap of deductions may be necessary. Surveys have indicated that the rich will not stop investing in their businesses if their tax rates go up several points. Nonetheless, the battle continues. When all is said and done, it is pretty safe to say that tax rates will go up and deductions will go down. Some tax planners are advising their clients to take income before the end of 2012 especially if derived from capital gains and dividends. Democrats have targeted these two “evils” as requiring higher tax rate reform. They believe, and it may be true, that America's wealthiest live on income derived from these sources. Taxpayers counting on mortgage interest deductions in 2013 should watch the legislation carefully as it proceeds through Congress.

3). Hurricane Sandy's devastation of New Jersey is depressing. Even Chris Christie was moved to tears seeing the Wild Mouse in the ocean at Seaside Heights. People up and down the coast have seen their homes destroyed and their memories tarnished. The IRS has responded somewhat to the emergency situation. Many tax filers have had the time to file payroll and excise tax returns for the third and fourth quarters of 2012 extended to February 1, 2013. This is true also of estimated tax payments for the quarter ending December 31, 2012. The IRS relief applies to individuals and businesses in disaster areas in New York, New Jersey and Connecticut. Better yet, in an internal memorandum IRS collection agents have also been advised that its enforcement activities would be suspended beginning October 26, 2012 through February 1, 2013 in what the memo calls the IRS Designated Disaster Areas which includes most all of New Jersey. The IRS memo specifically lists Atlantic, Bergen, Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean, Somerset and Union counties. These counties were designated by FEMA to be eligible for individual assistance. If FEMA declares additional counties so eligible the suspension of enforcement action by IRS agents will be extended to those additional counties as well.