Financial Industry Plans for Fiscal Cliff Fallout

By Andy Meek

The media and political leaders may be in full-on freakout, the world-is-ending mode over the apparent inevitability of the country to avoid careening over the fiscal cliff.

But financial professionals like Robert Smithwick III, managing principal of Diversified Trust, still have a job to do.

Their clients still are searching for a port in the storm. With next year’s tax picture uncertain, many want to sell assets and investments now and rid themselves of a tax hit. Deductions, exemptions and a lot more also remain up in the air.

Smithwick advises, first, taking a deep breath.

Also: diversify, diversify, diversify.

“When you believe in diversification, as we do, it allows you to wade through any type of market environment and come out in relatively good shape, versus making bets on different asset classes which can whipsaw you a lot more,” he said.

That’s what financial professionals like him counsel as the response of prudent investors to the self-inflicted wounds to the national economy brought on by Washington gridlock.

Never mind the current level of economy uncertainty. Smithwick said fundamental investment principles still dictate making buying decisions based on the prospects of a company – not on whether there’s a risk of paying more taxes on the profits from a particular investment move. And not by moving into and out of stocks based on the news cycle.

In other words, don’t let the tax tail wag the investment dog, as the saying goes.

Sandy Marshall, a senior tax director with Cannon Wright Blount LLC, likewise advises investing in stocks not for the dividend payout but for long-term gain potential. That could defer income into future years, when the investor may be below an income threshold.

“I’ve been in this business for 28 years advising clients on financial advisory matters, and this has really been the most uncertain period of time I can remember,” he said. “The environment we have is we just don’t know what the rules are going to be. What we’ve had to do is deal with the facts of what we do know and try to speculate on what might happen next year.

“But what compounds all this even more is just the emotional nature of all this.”

Here are some things already on the horizon in 2013:

“From an income tax perspective for investors in higher tax brackets, we know for sure already in place as of Jan. 1 will be an investment surcharge on their net income, which will go toward payment of Obamacare,” Smithwick said.

That includes a Medicare surcharge on payrolls. According to Marshall, the Medicare contribution tax is equal to 3.8 percent of the lesser of net investment income or the amount by which modified adjusted gross income exceeds the tax threshold.

Those thresholds are $200,000 for individual filers and $250,000 for joint filers.

Other issues include most taxpayers generally expecting their taxes to rise in 2013. Deductions could be dramatically curtailed, and the payroll tax cut could be on the chopping block.

If anything happens to charitable deductions, Smithwick said, that could have huge consequences for nonprofit groups, which depend on giving to meet their budgets.

“My hope is when we do have some rules, we’ll be able to focus back on what the impact is on long-term planning, take the guesswork out and really deal with the facts again,” Smithwick said.