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Navigating the Fiscal Cliff

Access an array of Morningstar and handpicked outside expert commentary on the fiscal cliff and the best way for investors to prepare. 

Morningstar.com, 11/20/2012

One of the biggest question marks hanging over investors' heads right now is how, or if, Congress will fix the looming fiscal cliff.

On Jan. 1, a slew of new tax changes and spending cuts is poised to take place. The Bush-era tax cuts will expire, the alternative minimum tax (AMT) will snare more taxpayers, the payroll tax holiday will sunset, and the new investment surtax to pay for the Affordable Care Act will take effect. On the spending side, defense, discretionary spending, and entitlement cuts are on deck, and unemployment insurance will be scaled back.

All-in-all, the cuts and tax increases could amount, by some estimates, to more than $700 billion. The nonpartisan Congressional Budget Office reckons that the economy would shrink by 0.5% in 2013 if current law is followed, and that unemployment would rise up to 9.1%.

But how likely are we to fall over the cliff? There seems to be broad agreement on some items (indexing the AMT to inflation, eliminating the payroll tax holiday), but will a dispute over raising rates on taxpayers earning more than $250,000 derail the entire deal? And what does all of this uncertainty mean for investors?

Below, we've complied Morningstar's take as well as outside expert opinions on these questions. We'll update this page as negotiations continue, so be sure to check back regularly.

Morningstar's Take
Market to Congress: Time to Work (Nov. 10, 2012)
With large declines this week, markets were signaling that Congress must start solving the fiscal cliff--now.

Can We Tackle the Deficit Without Courting Recession? (Nov. 7, 2012)
It's possible to address the deficit while still maintaining economic growth, but swallowing the whole fiscal cliff at once would be too much for the economy, says Morningstar's Bob Johnson.

Measuring the Fiscal Cliff (Oct. 10, 2012)
Morningstar's Bob Johnson details the components of the upcoming so-called fiscal cliff, suggests a possible smaller-cliff scenario, and weighs the potential economic impact of both.

Guideposts in an Uncertain Tax Environment (Oct. 3, 2012)
Investors can do more harm than good when they start reacting to what they think might happen in a period of substantial uncertainty, says Vanguard's Joel Dickson.

Tax Talk: What to Do With Dividend Payers (Sept. 26, 2012)
Christine Benz answers reader questions about how to handle dividend payers in light of potential 2013 tax increases.

Tactics for Tax-Gain Harvesting This Fall (Sept. 19, 2012)
Taking a capital gain this year on some securities could pay off for certain investors, even if capital gains rates remain at lower levels, says Pinnacle Advisory Group's Michael Kitces.

Will Life Sciences Firms Fall Off the Fiscal Cliff? (Aug. 30, 2012)
Even if the NIH is drastically cut, we don't see a doomsday scenario for these companies, and some of the industry's stronger players are now trading at attractive valuations.

Morningstar.com offers coverage of more than 1,700 stocks, 1,700 mutual funds, and 300 ETFs, plus market news, economic analysis, portfolio-planning insights, and investment commentary.
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