Tax Planning with Certainty? More Art Than Science.
By Jim Underwood
May. 03, 2013
Congress passed the American Taxpayer Relief Act of 2012 on "December 32, 2012." (They couldn't get it done on the 31st). We now have even more complexity in our tax laws, but supposedly more certainty. For 2013, there are new ordinary income and capital gains tax rates for individuals with over $400,000 and couples with over $450,000 of taxable income to go along with renewed phase-outs of personal exemptions and itemized deductions starting at $250,000 and $300,000 of adjusted gross income respectively.To add to this confusion, the new Medicare surtax, created by the Affordable Health Care Act, imposes an additional 0.9 percent tax on wages and 3.8 percent tax on most unearned income for taxpayers with modified adjusted gross income above $200,000 and $250,000 respectively. Other provisions that affect many taxpayers were reinstituted, some permanently and some temporarily.Additionally, we have multiple benefits, credits and deductions that phase out at varying levels of income. Finally, there's the ever-popular Alternative Minimum Tax that calculates your tax liability using different deductions and rates to make sure everyone pays "enough."Now that we know the rules, we can calculate the tax consequences of financial activity and significant tax planning strategies with more certainty than was the case last year.However, apparently "permanent" means something different to most of us than it does to our political leadership. Numerous House and Senate proposals for tax changes are being discussed, and the President recently presented his fiscal year 2014 federal budget proposals. If adopted, many of the tax rates, limitations and benefits that have just come into the law may be changed again. The President's plan, for example, proposes to essentially reinstate many of the 2009 laws for estate and gift taxation. It would limit the tax benefit of many deductions to 28 percent. It would impose a new minimum overall tax requirement of 30 percent (the "Buffet Rule") on taxpayers with incomes over $1 million. It also proposes to limit retirement account accumulations to no more than about $3.4 million.The takeaway: Effective tax planning continues to be more art than science and requires not only sophisticated tax software but also a fair amount of intuitive guessing as to what the rules might be when plans put into place today come into fruition in the future. If you anticipate a significant financial transaction in your future, meet with your tax advisor to run projections, make educated guesses, and try to minimize the share of your resources that get converted into taxes.