The Fiscal Cliff

Now that the election is over, all anyone seems to be talking about is the fiscal cliff. Will the government prevent it? What will it take to reach a deal? But most importantly, what will it mean for the average American come tax time.

What is the fiscal cliff?

The fiscal cliff essentially means that on January 1, 2013 if there is no deal to avoid the cliff, automatic spending cuts will take effect. Additionally, Bush's tax cuts that have been in place for almost a decade will also expire. Most people will agree, no matter which side of the political spectrum they are on, that any deal that will prevent us from going over the cliff will be a combo of tax increases and spending cuts. Everyone is up in arms about a solution for the fiscal cliff since the ramifications of both spending cuts and an increase in taxes will cause major problems. The general repercussion is that for an increase in the amount of taxes an individual pays, he will see less in return in terms of government services.

How will a failure to come up with a solution to the fiscal cliff affect the average American family?

Here is the average tax breakdown the a family pays:

10% of income up to $17,400
15% of income from $17,401- $70,700

The "average" family in the U.S. is made up of 2.6 people, earning around $50,000. As it stands now, the base tax rate this "average" family will pay is $4,845. If the Bush tax cuts expire, this family will pay 15% for all income, which equals to $6,397, or an increase of $1,552. For a family making $50,000 this is a huge blow to their budget. This equates to less spending and less spending, never a good thing to jumpstart an economy.

What about deductions?

While our average family above doesn't actually pay $4,845 in taxes, since there are many deductions that lower the tax amount they pay, another potential ramification of the fiscal cliff is the disappearance of many deductions Americans rely on to lower their taxes. For example, the Child Tax Credit gives around a $1,000 deduction, after January 1, it will be around $500. Another example, the 2% social security tax cut (for the first $110,000 in income) is also scheduled to end on January 1. This equates to, for the average family, a $1,000 tax increase.

What's the solution?

Republicans want to prevent the Bush tax cuts from expiring. Democrats don't want too many spending cuts, especially a disproportionate amount of cuts that will affect lower income Americans. As of today,  both sides of the aisle seem more intent on fighting and getting their way than actually coming up with a viable solution. It reamins to be seen what will happen.

Will the fiscal cliff narrowly be avoided like the debt ceiling last year? Will we go over it and suffer the consequences? Stay tuned. The literal ball will drop at midnight on January 1st, wil the figurative ball drop as well?

Enrolled Agent vs. Accountant

I am asked all the time why I'm an EA (Enrolled Agent) and not an accountant or CPA (Certified Public Accountant), and what's the difference.

It's a common and understandable mistake to think that anyone who can prepare taxes or provides financial services is also an accountant. While the difference isn't huge, it should be noted that accountants, and not enrolled agents, can essentially perform audits. An enrolled agent does not have this ability. This means that while I can be audited and I can manage your finances to prevent audits (by doing work correctly and legally!) I cannot, on behalf of the government, audit an individual or business.

Aside from this auditing ability, I am capable and legally allowed to perform the functions most people of the public understand accountants and CPA's to be able to do. I can prepare tax returns, set up and manage billing and payroll for businesses and help individuals with financial and estate planning and give business advice. According to the NAEA (National Association of Enrolled Agents), of which I am a member, an Enrolled Agent is,

"An enrolled agent (EA) is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals."


The word enrolled is important. I am licensed by the NAEA and must maintain my license in order to continue practicing with the privileges granted to an EA. I am legally allowed by the Federal Government to prepare taxes and speak with the IRS on behalf of my clients.  I earned my license by passing a comprehensive exam and maintain my license by attending yearly continuing education courses. All candidates have a background check performed before they are licensed, so you should always work with a tax professional who is either a CPA or EA in order to ensure you are working with an experienced and licensed professional.

Why do I recommend Enrolled Agents who are members of the NAEA, like myself? Because the NAEA is both a respected and reputable organization representing my profession but the standards in order to maintain membership are important. Continuing education requirements and all EA's in the organization must abide by a strict code of ethics. These ethics and continuing education requirements exceed the standard the IRS sets for EA's and tax professionals in order to continue practicing their profession legally.

If you have more questions about the difference between a CPA and EA or want to learn more about my background, education and experience, give me a call or send me an email!

And don't forget tax season is in full swing! Be in touch with me if you haven't yet begun preparing your 2011 Tax Return.

Mint.com - Manage Your Finances and Savings Goals

I like to encourage all of my clients to take charge of their finances and become an active participant in their financial lives. While as an accountant I’m here to do your taxes and answer questions you have about savings goals, retirement or how to manage credit card debt unless you’re an active and informed participant in that conversation you won’t get anywhere.

I recommend mint.com for everyone as an easy and free way to get the bigger picture on your financial life. It offers tons of features and you can pick and choose which you use and which aren’t for you. From notifications about upcoming credit card and bill payments to alerts when a checking or savings account goes below a certain dollar value, Mint does it all. Set monthly, yearly and long term savings goals to keep the goals you set on track.

You can even track stock and other investments through your account as well as your debt whether it be credit card debt, school loans, a mortgage or your car loan.

While everyone’s finances are different, some simple and some more complicated, Mint is a great place to start when trying to make sense of everything or when you just want to have all your accounts, money and investments laid out in front of you all in one place. Especially as you prepare to file taxes this year, make a big financial decision or just to sound like you know what you’re talking about when you come meet with me. :)