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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.

Sturdy Shelters for a Cloudy Tax Forecast (July 26, 2012)
Many of the best practices for tax efficiency are even more important for investors in light of possible tax increases next year, says Morningstar's Christine Benz.

Dividends' Appeal Will Endure (July 23, 2012)
Policymakers will likely keep tax rates low, but even if current rates expire, dividend payers would still offer a superior source of income, says Morningstar's Josh Peters.

Stay a Step Ahead of the New Medicare Surtax (July 16, 2012)
Munis, Roth IRA conversions, and proper asset location are more valuable than ever as tax rates could increase next year.

Anticipating 2013 Tax Changes Could Save You Some Dough (Feb. 13, 2012)
Advanced planning can help reduce your tax bills if and when tax rates pop back up.

Perspectives

Congressional Budget Office
Economic Effects of Policies Contributing to Fiscal Tightening in 2013 (Nov. 8, 2012)
Significant tax increases and spending cuts are slated to take effect in January 2013, sharply reducing the federal budget deficit and causing, by CBO’s estimates, a decline in economic output and an increase in unemployment.

Lord Abbett
Surveying the Post-Election Landscape (Nov. 14, 2012) 
Now that the election is over, asset managers are assessing the opportunities and risks—such as the looming “fiscal cliff”—within their respective markets.

Oppenheimer Funds
After Election, Focus Turns to the Rest of the World (Nov. 12, 2012)
The fiscal cliff fight heats up.

PIMCO
After the Election, Fiscal Cliff Outcome May Surprise (Nov. 9, 2012)
Our base case for a fiscal cliff resolution continues to be a lame-duck mini-deal, but there is now a greater likelihood of so-called tail events.

PIMCO
Dividends and the Fiscal Cliff – Look Out Below (Nov. 9, 2012)
Near-term volatility in dividend stocks will affect the narrow spectrum of U.S. dividend payers with greater than 3% yields that investors have crowded into, including U.S. telecoms and utilities.

Charles Schwab
Election 2012: Takeaways for Investors (Nov. 9, 2012)
With the 2012 presidential election in our rearview mirrors, let's take a look at the results and discuss what investors might see in the coming weeks and months.

Northern Trust
The Election’s End Is Only the Beginning (Nov. 8, 2012)
In the aftermath of the election, here are some things that we’ll be watching for.

Knowledge@Wharton
What Now, Mr. President? (Nov. 7, 2012)
What should Obama prioritize over the next four years?

Baird
The Election is Over – Now What? (Nov. 7, 2012)
Still divided Washington looks to address Fiscal Cliff, expired provisions. 

Columbia Management
Hiking the Fiscal Cliff (Nov. 2, 2012) 
Below are the key tectonic guideposts to understand how the interlocking tiers of political stratification could play out during the upcoming lame duck session. 

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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