Sheryl Rowling

ContactSheryl L. Rowling is Chief Executive Officer of Total Rebalance Expert, a rebalancing software solution designed to bring portfolio management to a new level with features such as Analysis Expert and Tax Loss Harvesting, both at the touch of a button. TRX enables advisors to significantly grow their practices through the efficient delivery of high-quality services.
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With Tax Law Changes So Uncertain, How Should Advisors Approach Year-End Tax Planning? edit
Saturday, December 03, 2011 17:20

Tags: Congress | estate planning | Internal Revenue Service | IRS | planning | tax planning | year end tax planning

With the time for year-end tax planning upon us, advisors should step back, get some perspective, and ask themselves. With so much uncertainty about how tax laws might change in the months ahead, how do I make wise tax planning decisions for clients? 

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Legislation passed in December 2010 provided a short reprieve from uncertainty by retaining the current lower tax rates through 2012.  Even assuming that we can count on the current tax rules through 2012 (which is not definite), what happens beyond that is subject to much debate in the political arena.

The Federal deficit and national debt continue to grow, and the U.S. economy continues to struggle.  Although budget cuts might make a dent in the deficit, tax reform of one kind or another is sure to be part of the package.

For planning purposes, unfortunately, no single tax reform proposal has garnered majority support.  The looming sunset of the Bush-era tax cuts at the end of 2012 only increases the uncertainty.


No one can predict the outcome of the tax legislation debate. But let's try to reason through it.

 

The big uncertainty is which way will tax rates go?  The Democrats believe that raising taxes is required to begin to repay the deficit.  Republicans believe in the “trickle down” theory, proposing lower tax rates to stimulate the economy. 

 

President Obama’s jobs bill includes a 5.6% surtax on an individual’s earnings in excess of $1 million, informally known as the “Buffet Rule.”  Republicans have introduced their own jobs plan, which features a reduction in both individual and corporate tax rates, to 25%.

 

How do you plan in this environment?  Well, let's look at what we do know.

 

A good thing about the uncertainty is that taxpayers still have the benefit of relatively favorable income, gift, and estate tax rates for the remainder of 2011 and 2012.  We also know that tax rates are scheduled to increase and various tax benefits are scheduled to sunset by the end of 2012. 

 

Lurking on the horizon is a new 3.8% surtax on net investment income and an increase in the Medicare payroll tax of 0.9%, both of which arose out of 2010’s health care legislation.  These come into play in 2013 for individuals with adjusted gross income (AGI) above $200,000 and married couples filing jointly with AGI over $250,000. 

 

All of this creates a tidal wave of tax changes, as highlighted in the chart below, and makes 2011 and 2012 very important for tax planning to ensure that you can blunt the wave’s impact.

 

TOP TAX RATES

 

RATE

INCREASE

 

2011 – 2012

2013

Ordinary Income

35%

43.4%

24%

Long-Term Capital Gains

15%

23.8%

59%

Qualified Dividends

15%

43.4%

189%

Estate and Gift

35%

55%

57%

 

In the articles to follow, I'll present planning ideas to consider before the end of this year and into 2012. 


I’d like to acknowledge Moss Adams LLP for providing much of the content in this article from its Year-End Tax Planning Guide: 2011 (http://goo.gl/O00A1)

 

Any tax advice contained in this article, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax-related penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law of (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

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