Expiring laws, election complicate tax planning

(Editor’s note: This is the first in a three-part series on tax-planning considerations and strategies for tax year 2012.)

With the political uncertainty typical of a presidential election year, navigating year-end tax planning can be quite a challenge. Planning for 2012 is particularly difficult because many Bush-era tax initiatives are set to expire and tax rates to increase in 2013. Without a crystal ball, taxpayers should work in concert with their financial advisers to plan as best as they can with the information currently available and despite the uncertainties. To help ease the process, here’s an overview of various 2013 tax scenarios and how they might affect 2012 year-end planning.
Most 2012 income tax rates are scheduled to increase in 2013, and many tax breaks are set to expire. The two presidential candidates have vastly different proposals for addressing these scheduled changes. Whoever wins, there’s no guarantee that his proposal will become law.
In fact, unless the winner’s party also controls a majority of seats in the House and at least 60 seats in the Senate, it’s probably unlikely that his proposals will be passed in their current form.
All of this uncertainty complicates traditional year-end tax planning. To reduce your current year’s taxes, you generally must implement tax-reduction strategies by the end of the year. But many strategies depend on how your income will be taxed this year versus next year, as well as on what tax breaks will be available each year.
If Congress does nothing, 2013 ordinary income tax rates will be higher for most taxpayers. President Barack Obama has proposed retaining 2012 rates for only the middle and lower brackets – taxable income below $200,000 (singles), $225,000 (heads of households) or $250,000 (married filing jointly; $125,000 for separate filers). Gov. Mitt Romney has proposed reducing tax rates below 2012 levels for all taxpayers. • For married filers, this rate would start applying at a significantly lower income level compared to where the 25 percent rate started to apply in 2012, because of the expiration of a marriage-penalty-relief provision.
• Because of the $125,000, $200,000, $225,000 and $250,000 thresholds for tax increases under the Obama proposal, in this bracket only taxpayers exceeding the applicable threshold would see a rate increase to 36 percent (on the excess until the 39.6 percent rate applied).
Traditional income-and-deduction timing strategies depend on what your marginal tax rate (the rate you pay on your next dollar of ordinary income) is this year and what it will be next year. If your marginal rate will go up next year, you’ll likely be better off accelerating income into 2012 (when it will be taxed at a lower rate) and deferring deductible expenses to 2013 (when the deductions will be more valuable). Yet if your rate will stay the same or go down, taking the opposite approach may be better.
Another consideration this year is the Medicare tax increase under the health care act: Starting in 2013, taxpayers with earned income over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay an extra 0.9 percent (from 1.45 percent to 2.35 percent) in Medicare taxes on the excess earnings. If you’ll be subject to this tax, accelerating income into 2012 could be beneficial even if your marginal rate doesn’t go up in 2013.
However, this provision also could be affected by the election. A Republican-controlled Congress could repeal the health care act. The repeal would likely be signed into law if Gov. Romney is elected, because its repeal is one of his goals. If President Obama is re-elected, a repeal would have to have enough votes in Congress (two-thirds in both chambers) to override his veto. Also keep in mind that President Obama and Gov. Romney have both proposed some changes related to deductions, which also could affect your year-end planning. President Obama has proposed limiting itemized deductions to a 28 percent benefit for higher-income taxpayers. Gov. Romney has proposed eliminating or reducing the benefit of some deductions in order to reduce tax rates without increasing the federal debt. However, as of this writing, he hasn’t discussed which deductions would be affected.
With so many different tax scenarios still a possibility, determining how to time your income and deductible expenses is a challenge. So, where possible, consider waiting at least until after the election before making timing-related decisions about such actions as:
• Taking bonuses.
• Recognizing consulting or other self-employment income.
• Taking retirement-plan distributions (to the extent not required).
• Paying 2012 state and local income and property tax bills that aren’t due until 2013.
• Making charitable contributions.
But don’t completely put off your income and deduction planning. By working with your tax adviser to project your year-to-date income-and-deductible expenses now, you’ll be in a better position to act quickly whenever the tax outlook becomes more certain. •


Grafton “Cap” Willey, CPA, is a managing director in the Tax Group at CBIZ Tofias. He can be reached at GWilley@cbiztofias.com. CBIZ Tofias is a leading accounting provider with offices nationwide including Providence, Newport, Boston and New Bedford. The company operates in association with Mayer Hoffman McCann P.C. – Tofias New England Division, an independent CPA firm, that delivers audit and other attest services.

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