‘Taxmageddon’ Is Coming. Are Your Clients Ready?

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.