The Free Press, Mankato, MN

December 28, 2012

Fiscal cliff will hit local baggers, farmers, workers

By Tim Krohn
Free Press Staff Writer

MANKATO — The end of the year is Marie Dranttel’s time to plan for her clients, but the St. Peter CPA said that’s been a bear of a job with the “fiscal cliff” debate unsettled in  Washington.

“It’s hard to plan for the future when you don’t know what the rules will be. It’s just going to be a mess,” said Dranttel of the uncertainty surrounding automatic spending cuts and tax increases that kick in Tuesday if Congress fails to pass legislation.

The automatic changes will trigger tax increases and spending cuts that would slash the federal deficit by $503 billion next year. The Social Security tax, known as FICA, will jump 2 percent, more people will have to pay the more costly Alternative Minimum Tax and the capital gains tax will jump to 20 percent, among other impacts.

“It’s going to hit everyone, even the kid bagging at Hy-Vee who is going to see a 2 percent increase in FICA. That’s a lot of money to a 17-year-old bagging groceries,” Dranttel said.

She’s been working with much larger figures for many of her business clients, particularly farmers. Rather than the traditional strategy of shifting some income into the next tax year, she’s been moving the maximum amount of farmers’ income into this year’s taxes. That will get them a lower tax payment than they’d see in 2013, but it also pulls more cash out of their pocket now.

“They’re paying some significant amount for taxes this year.”

And she’s been advising farmers who’ve been considering selling high-priced farm land to do it before capital gains taxes jump.

“I just had a land sale where the difference between selling this year and next was almost $90,000 (less in taxes),” she said.

She said changes to the Alternative Minimum tax would pull more middle-income earners into higher tax rates. The AMT now kicks in for the highest wage earners but next year those with an adjusted gross income of about $70,000 would pay the AMT. “It brings their tax rates up quite a bit.”

“Middle income earners are going to get hit a lot. Just the FICA increase will be a big hit,” Dranttel said.

She said that if and when Congress does finally make decisions on taxes, the fact they waited so long is going to cause problems far into next year.

“Think about the poor computer programmers who don’t know what to do (with tax software). I can’t imagine what the IRS software planners are doing. They can’t even take e-file returns until this is settled,” she said.

“It shouldn’t be this way. Everyone should be contacting their elected officials.”

Kevin Burns, director of public affairs at Mayo Clinic Health System — Mankato, said that if no action is taken in Washington before Jan. 1, the health system will continue to use 2012 withholdings for employees’ paychecks into next year.

“We, like other businesses are going to have to carry over 2012 rates for withholding until a new agreement is reached,” Burns said of Mayo, the largest private employer in Blue Earth County.

When legislation is passed, it will likely be retroactive to Jan. 1, so businesses will have to adjust employee withholdings over the rest of the year to match whatever the legislation calls for.

He said that if a last minute deal is reached before Tuesday, Mayo is ready to make adjustments to withholdings in employees’ next paycheck if needed.

One thing that won’t be affected — whether a deal is reached or not — is how much Mayo and other health providers are reimbursed by the government for Medicare cases and some other services. Those were exempted from the automatic spending cuts.

For charitable organizations, the big hit from the automatic events next week won’t be on the tax side but on the federal spending cuts that are triggered on all agencies.

“Across the board cuts would have an immediate impact on us,” said Bob Tereba, executive director Catholic Charities Winona Diocese, which covers 20 counties including Blue Earth County.

The group gets about 40 percent of its funds from government, including for their refugee resettlement program and guardian conservator program for indigent adults.

“As bad as that is, across the board cuts on federal spending would shred the safety net for those who are poor and vulnerable — everything from food and housing to unemployment benefits,” Tereba said.

Ken Klooster, a financial advisor with Edward Jones in Mankato, said he’s been telling clients with investments in the stock market to stick with their investment strategies.

“We’re telling them to just stay the course. There’s always another purported disaster around the corner.”

While the stock market has been down because of the fiscal cliff uncertainty, Klooster hasn’t fielded a lot of calls from worried clients. “There are concerns, but they aren’t overreacting.”

And while some people are making certain decisions based on anticipated tax changes, such as the capital gains tax, Klooster said he advises that people don’t make investment decisions based solely on tax reasons.

He suspects there won’t be a last minute deal in Washington. “They’ll probably get it settled in January and make it retroactive to Jan. 1.”