October 29, 2012

‘Taxmageddon’ Is Coming. Are Your Clients Ready?

Sunsetting provisions, other factors offer opportunities for tax planning

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In a webinar, advisors were provided a chance to explore changes in tax law that included provisions that end at the year's close, as well as changes made during the course of the year and how to provide advice to clients on tax planning measures.

The webinar, titled “2012 Tax Law Update—Changes and Opportunities for Individual and Business Clients,” was offered by CCH, a Wolters Kluwer business, and given by CPA and attorney Mark Luscombe, CCH’s principal analyst. It was an extensive and wide-ranging seminar that dealt with everything from the ramifications of the 2001 and 2003 Tax Act sunsets to tax provisions of health care reform and tax proposals by both presidential candidates.

Luscombe called the scenario awaiting tax planners “Taxmageddon,” because of the numerous factors involved and the uncertainty surrounding any elements of tax law that might or might not change thanks to congressional inaction and the upcoming election. He pointed out that there are nearly 70 tax provisions that expired at the end of 2011 alone, with varying chances for extension.

That, of course, is not the only dilemma—or group of dilemmas—facing advisors as they seek to prepare their clients for the upcoming tax season and days to come. Other factors at play include the approaching sunset of the Bush tax cuts and other tax laws, the phasing in of health care reform’s tax provisions, the fiscal cliff and the impact of any potential new policies, and interpretations of old policies, on clients’ taxes.

The sunset of tax cuts and the move to higher tax brackets and lower exemptions, suggested Luscombe, might make it advisable for clients—both individuals and business owners—to accelerate income and get payments this year, if possible, rather than holding them till 2013. The reverse is true about deductions; postponing them till 2013 could help shield income against the higher brackets.

Capital gains can be harvested this year as well, to take advantage of the lower maximum tax rate on net capital gain for noncorporate taxpayers. As long as the sale is bona fide and the proceeds are received this year the realization of gains can be accelerated. And, since there is no wash sale rule on claiming gains, clients can sell capital assets, realize the gains, and immediately rebuy the assets, thus establishing a new tax basis with the amount of the purchase price.

Even actions like adopting a child might be better moved into 2012 before the adoption tax credit falls by $1,000 and the refundable element is eliminated. The same goes for education, since the maximum allowable contribution to a Coverdell education savings account (ESA) will fall from $2,000 back to $500 if not extended.

The alternative minimum tax (AMT) offers a huge potential for increasing clients’ tax bills, but absent action from Congress, will capture a massive number of additional taxpayers—an additional 27 million will find themselves paying the AMT. While the exemption amounts in 2011 were $48,450 for unmarried taxpayers filing individually and $74,450 for married taxpayers filing jointly and for surviving spouses, currently the exemptions in 2012 fall to $33,750 for unmarried taxpayers and $45,000 for married taxpayers filing jointly and surviving spouses.

With many opportunities to anticipate tax changes come risks as well. Sunsetting provisions get treated as if they never existed, said Luscombe, which creates additional complications. In many cases there’s no guidance on how such things will be treated. Gift and estate taxes fall into this category, since there is a possibility that if someone gifts $5 million in assets this year and the provision sunsets, there could possibly be a clawback into an eventually taxable estate.

Another such provision is the tax credit for employer-provided child care, which will disappear at the end of the year if not extended. While employers who terminate child care services altogether might have to recapture some of the credit, Luscombe suggested they might instead want to consider spending less on child care or charging employees more for the services, which then could be at least partially funded through a child care flexible spending account.

There was much, much more—meaning that advisors, clients and their tax advisors will have their hands full in accommodating all the possible permutations of the tax situation for both individuals and businesses regardless of the outcome of the election. Many aspects of the tax landscape will change no matter who ends up in charge in January.

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