Uncertainty Poses Challenges for Tax Planning
Everyone has heard the old Benjamin Franklin quote about the only certain things in life being death and taxes. The certainty of taxes, however, is far more subjective than the first.
This is not only because of the inherent complexity of the modern tax code, but also because of the recent Supreme Court decision regarding the Affordable Care Act (“ObamaCare”) and its implications on individual taxation and penalties, but also because of numerous tax provisions that are automatically set to expire.
2012 Reviews of Professional
The most often discussed of these is the possible phasing out or changing of the 2001 and 2003 Tax Acts (the “Bush Tax cuts”), which have been continued since 2001, and are set to expire at the end of 2012. Whether those cuts are reapproved, changed or expire, however, they won’t affect taxes for TY 2012, but not knowing what may happen makes effective tax planning strategies challenging, to say the least.
The Alternative Minimum Tax “band-aid” is also a familiar source of angst, and it is once again set to expire at the end of the year. This would increase the number of taxpayers exposed to the AMT by returning the exemption amount to a lower amount.
Other tax provisions set to expire next year include the 15 percent Capital Gains Tax rate, and reverting of the Unified Gift and Estate Tax Exemption. The first would result in the maximum capital gains tax rate returning to 20 percent next year, while the second would return combined gift and estate tax exemption back to $1 million from the current $5.12 million.
There are even more provisions set to change or expire, including credits for things as varied as adoption, electric vehicles, energy efficiency, veteran employment, teaching expenses and even mortgage premiums.
Although all of these potential changes in taxation can lead to uncertainty, particularly when also preparing for planned and unplanned life events of taxpayers, there are several programs on the market designed to give tax professionals tools for planning multiple scenarios.
The systems in this review section all include at least the current tax code, along with anticipated phase-ins and phase-outs, make it easier to project tax liabilities and develop strategies for minimizing them in several scenarios, such as: What if the AMT reverts, but the estate tax doesn’t? What if the Bush Tax cuts expire partially or in whole? What about the other various credits?
Depending on the needs and complexities of you firm’s 1040 clients, some of the programs also offer further advanced tools, planning for dozens or even unlimited future and past years across multiple scenarios, and even integration with tax research resources, expert analysis and opinion. Many also offer the tax code and research materials for states and local jurisdictions with income taxes.
A few of the more advanced systems also offer expanded analysis and reporting functions that provide graphical elements for helping explain and demonstrate to clients the potential changes to these laws, as well as how certain proactive steps can help them offset all or part of the negative changes, or even put them in a better tax position than they are currently in.
The success of proactive planning is proven to be effective at preparing and making financial decisions that reduce tax liability not only for the most complex clients, but for more traditional households, as well. And it doesn’t require having a crystal ball to predict what parts of the code will or will not change. What it does take are the right planning and preparation systems.
As complex as individual income taxation is, particularly in the coming few years, tax planning engagements are an increasingly valuable service that can help reassure your clients that you can help them prepare for virtually any changes.
Potential Tax Changes for 2012
Affordable Care Act (ObamaCare)
2001 & 2003 Tax Cuts (Bush Tax Cuts)
Alternative Minimum Tax (AMT)
Capital Gains Tax (CGT)
Unified Gift & Estate Tax