CNBC has a time clock count down on the TV screen for the “Fiscal Cliff” – a term that we are not even sure who used first, but it was certainly brought into the mainstream by Fed Chairman Bernanke when he referred to it in a speech before Congress. Some clients I talk to are not even sure of what this term really means? The simple definition of the “Fiscal Cliff” is a combination of expiring tax cuts and across the board spending cuts scheduled to become effective December 31, 2012. The levels of these tax increases and spending cuts are considered to be “draconian” in scope and it is thought that should they go into effect unchanged, our taxes will rise dramatically, along with large government spending cuts and our economy will slow. At the heart of the “Fiscal Cliff” are the Bush Era Tax cuts passed by Congress under President George W. Bush in 2001 and 2003. These include a lower tax rate and a reduction in dividend and capital gains taxes as the largest components. If the Bush tax cuts simply expire, the long term capital gains tax will increase to 20% from 15% and qualified dividend tax rates will increase to the individual’s marginal tax rate up from a fixed 15% under the current plan. Additionally, the current estate and gift tax exemption of $5.12 million will drop to $1 million. Currently, the tax on estates valued over $5.12 million is 35%. After the “Fiscal Cliff”, a 55% tax rate on estates over $1 million will apply. What is the probable outcome? A combination of tax increases and spending cuts seems inevitable and it is a matter of how much each side (Republican / Democrat) is willing to compromise and can this compromise occur before the end of the year? If that were to occur, it is thought that this would show how our government can act when necessary and confidence would rise in the economy. It is certain that both sides are hopeful a compromise can occur. Short term, there is no way to know how this plays out. We hope that an agreement is reached, but we cannot be sure of it. Most clients have decided that if the gains are not too large, an investment should be held and not sold hoping to benefit from the long term performance they and we believe will occur in their holdings. Considering that capital gains taxes should not rise too dramatically in the scenarios we know about, this makes sense. It is obvious that this is an individual event, client by client. So, we encourage you to contact us to go over the possible scenarios and we can decide to act or not according to your wishes. We wish you good tidings and a happy holiday season – Mark   The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investments(s) may be appropriate for you, consult your financial advisor prior to investing.  “Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average 1s an unmanaged index and cannot be invested into directly.  Past performance is no guarantee of future results. References:   LPL Financial Weekly Economic Commentary dated 12/4/2012, Don Hays Financial Commentary and Investopedia.