Congressional inaction will affect your tax planning
TERRY SAVAGE email@example.com September 23, 2012 5:24PM
Updated: May 3, 2013 12:15PM
Congress went home last week. They left their jobs undone. But they went back to persuade you to re-elect them to the same job. In fact, they went home to persuade you to contribute to their campaigns to get re-elected. And while they’re campaigning, you should do some tax planning.
Each representative gets paid $174,000 a year. (The “leaders” — the majority and minority leaders — get $193,400.) Our congressional representatives participate in a generous health-insurance plan. They also get free parking at the office and D.C. airports, child care, free meals at the legislative dining hall, and cheap membership to the House gym.
And of course, there is all that time off: Out of 260 working days in a year, Congress works only 137 of them!
Wouldn’t you want a job like that? Wouldn’t you get the job done if you had it? Wouldn’t you be embarrassed to ask for financial help (campaign contributions) to keep your job if you hadn’t done it?
What Congress DIDN’T do
♦ Congress didn’t pass a budget. In fact, Congress hasn’t passed a budget for the federal government in the past three years. They did manage to pass a “continuing spending resolution” in the last minutes before they adjourned last week. But that spending increases our national debt by more than $1 trillion every year.
♦ Congress didn’t deal with the debt ceiling. Well, that follows the budget issue. If you think you can keep overspending because you don’t have to create a budget, and if you can depend on the Fed to keep creating money and making it easier to borrow by keeping rates low, then you don’t have to worry about running out of credit. The only thing they could all agree upon was to postpone raising the national debt ceiling until after the election.
♦ Congress didn’t deal with impending tax increases. It’s automatic. The “Bush tax cuts” will disappear at year-end. And taxes will go up across the board in January. It’s not the sensible way to deal with a still-foundering economy. But Congress didn’t deal with the tax issue either.
♦ Congress didn’t deal with automatic spending cuts. These cuts into military and domestic programs, totaling $109 billion, will go into effect at year-end — because Congress couldn’t agree on a rational deal before Thanksgiving last year — an important deadline, which they simply ignored.
What do all these critical issues have in common? Congress didn’t do their job! No matter what side of the aisle you’re on, you’re paying the bill for this non-performance.
Think of it this way, if you told your employer that you hadn’t finished your work — or, in fact, hadn’t really started your work — and that you were “leaving early,” what do you think would happen? You’d be fired, for sure.
Well, you’re the boss. You have the vote. Yet according to the independent, non-profit Center for Responsive Politics (www.OpenSecrets.org), more than 95 percent of those serving in the House of Representatives are re-elected each year. Exceptions occurred in 2010 and in 1992, when “only” around 85 percent of members were re-elected.
Maybe if Congress had as much reason to fear unemployment as you do, they would at least do their jobs. But you’re the only ones who can fire them for non-performance.
Yes, it’s possible that there could be a last-minute deal in the “lame duck” session after the election in November and December. If some members of Congress are not re-elected, they might be more inclined to work together before the new Congress is sworn in come January 2013. Or they might be more likely to hold out, despite the consequences, if they know their party has gained seats to pass their version of legislation next year.
More likely, just as they passed the continuing spending resolution before departing Washington last week, the will create a temporary fix to extend the decision out until next Spring. They’re good a passing the buck. This Congress goes down in history as by far the least productive, in terms of passing bills, of any in history.
In the meantime, the U.S. could have its credit rating downgraded. The stock market (and your retirement funds) would become increasingly volatile and vulnerable. And lack of any agreement by year-end would result in a leap over the fiscal cliff and into a more devastating economic slowdown.
That is no recipe for a happy holiday season.
So what should you be doing? Start your year-end planning now, despite the uncertainty.
♦ Don’t overspend on holiday shopping if you haven’t planned for higher taxes and withholding next year. There will be less left over in your check to pay the bills.
♦ If you own stocks (outside your retirement plan) with a long-term capital gain, consider selling now — before the year-end rush — to take advantage of the current low capital gains tax rates, scheduled to expire Dec 31.
♦ Consider converting one or part of your IRAs to a Roth IRA, so you can pay taxes at the 2012 lower rate — and withdraw later on a tax-free basis.
♦ Sad to say, but charitable deductions will be worth more to you next year, if rates rise. You might postpone your annual giving to the New Year. But beware that in 2013, reverting to pre-2010 rules, there will be a cap on itemized deductions for higher-income earners.
♦ Very wealthy people must consult estate planners now, before the estate tax returns in January at the $1 million level. (Since that “estate” includes the value of your home and retirement plan, and maybe even your life insurance, the cliff on estate taxes will impact even the very middle class.)
You can see how this uncertainty is already affecting financial decisions and slowing the economy. So there is one more thing you must do no matter what your political preference: Demand that the Congress do its job! You’re paying for it. You should at least get your money’s worth. And that’s The Savage Truth.
Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at TerrySavage.com and blogs.suntimes.com/savage.