taxes

Tax planning in uncertain times

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Highlights
  • Carrying out year-end tax planning could be a gamble or even a waste of time.
  • Some tax cuts instituted after the George W. Bush presidency also are at risk.
  • Follow safe strategies that are sure to be your best bets no matter what the end of the year may bring.

As the year ends, uncertainty surrounds taxes. Many tax laws are scheduled to expire at the end of the year, and the temporary tax cuts that felt so permanent may be at risk if Congress doesn't act soon.

As a result, carrying out year-end tax planning could be a gamble or even a waste of time. It is not just the wealthy who will be affected. Action -- or lack thereof -- taken by Congress before the end of the year will determine whether these tax benefits will be available for the following year for many taxpayers, including:

  • Parents who utilize the child tax credit.
  • Workers with fatter paychecks courtesy of temporarily reduced payroll taxes.
  • Everyone who has enjoyed the overall reduction in tax rates during the last few years.

Which provisions are at risk?

In 2001, former President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act, which reduced tax rates for all individuals. It included lower rates for taxes on income, capital gains and dividends.

In addition, allowable retirement contributions were increased, estate taxes were reduced, and the alternative minimum tax exemption was raised. The majority of these cuts are set to expire at the end of 2012.

Some tax cuts instituted after the Bush presidency also are at risk. During 2011, payroll taxes were temporarily reduced to help employees and self-employed individuals. These cuts quickly became known as the "payroll tax holiday."

As a result of the holiday, employees and self-employed individuals received a 2 percent reduction in payroll taxes (from 6.2 percent to 4.2 percent for employees, and 12.4 percent to 10.4 percent for self-employed individuals).

Originally set to expire at the end of 2011, the so-called holiday was extended through the end of 2012. Since many of these cuts now are set to expire at the end of 2012, and since Congress and President Barack Obama do not see eye to eye, there is little guidance as to what the tax rates will be in 2013.

So what should you do?

Should you accelerate expenses or risk carrying them into next year? Should you accelerate income or defer it? Will rates rise next year? Will they remain the same?

There are so many questions and possibilities that this year, some planning techniques will be nothing more than a huge gamble. You may have better odds playing the lottery than guessing the end result.

Instead, focus on the following safe strategies that are sure to be your best bets no matter what the end of the year may bring.

Planning for your investment dollar

If you have incurred losses on investment holdings, carefully examine your portfolio to determine whether it would be beneficial to realize these losses before the end of 2012. Question whether realizing these losses will generate loss carry-overs to be utilized in later years or whether these losses will create a substantial reduction in income in the current year.

If the realized losses will not create a substantial reduction of current income or a loss carry-over, it may be wise to consider waiting until 2013 or subsequent years to realize the loss.

James R. Washington III, a certified public accountant and tax attorney at Ajubita, Leftwich & Salzer LLC in New Orleans, says capital gains should be given careful consideration.

Washington says many tax advisers are urging clients to sell lucrative investments during 2012 in order to avoid the 3.8 percent Medicare tax scheduled to be implemented in 2013 and to avoid a possible hike in the capital gains rates.

"However, advisers and investors should be careful," Washington says. "This advice may work for some taxpayers, but not all."

For starters, the Medicare tax will only affect high-income individuals, he says.

"Also, if capital gain rates do not rise, taxpayers who hurriedly dump investments may not gain any benefit, may squander opportunities to defer tax and may lose money on reinvestment expenses," Washington says.

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