CHANGE: TOO MUCH OF A GOOD THING?

Life is a process of change and growth. We are conceived like spring, green with optimism and the hope of our parents. Born, we grow to youth feeling the heat of summer’s passion and confusion; a cold winter’s midlife sweeps in bringing frustration and pain; until, comes the autumn of years, we slow and savor the semi sweet melancholy of earned wisdom. These changes are all about us and within us as well. The changes we experience in life are neither preventable nor stoppable. Run from change, it will catch up and overtake you. Go to meet change and it will have arrived by another route. The best one can hope to do is to accept change as an inescapable aspect of life and adapt. If caught in a sudden rain storm, expect to get wet. Accept this reality and life is easy (paraphrased from the 1999 cult movie “Ghost Dog: The Way of the Samurai” starring Forest Whitaker).

Michael in the controversial movie 1978 “The Deer Hunter” (director Michael Cimiino) and Larry in W. Somerset Maugham’s novel “The Razor’s Edge” both are changed by the horrors of war.

Michael returns to his static Pennsylvania factory town following a harrowing tour of duty in Vietnam. His old friends are unchanged, stagnating in safe, familiar, womb-like surroundings where one’s future is known. Michael is changed and puzzles his old friends. The former deer hunter turns away from an easy kill having seen enough killing. The movie was criticized for its Russian roulette scenes which historians said did not occur in the war. The brutal scenes, however, are not about the war per se; but represent the risks of life, never knowing what is in the next chamber and how one cope’s with that uncertainty, that reality, outside of a comfort zone. Growth and progress require taking risks. Michael realizes that he and Nick must play the diabolical, deadly game to have the slightest chance at escape. Nick, the American, traumatized beyond reason, however, cannot stop gambling with life, survives the war only to perish in its aftermath. Michael also survives but with a retained and strengthened moral compass.

Larry, in Maugham’s novel (played by Tyrone Power in the superb 1946 film), is also traumatized but by WWI, returning to Paris, a stranger to his material, aristocratic friends, after a long absence. He has foregone love for an ascetic life in the Himalayas as the student of a Yogi. Upon returning, he appears to them calm and remote, silent, with a smile that is knowing and mysterious.

HAS PROGRESS CHANGED US FOR THE BETTER OR THE WORSE?

Consider the changes in the world wrought by discoveries, like the steam engine, printing press, automobile, computer, Einstein’s theory of relativity, motion pictures, digital photography, penicillin, vaccines, the smart phone, Face-book and Twitter, to name just some. What will be the next new thing that endemically changes our lives? It will be something unimagined.

Most would say I suspect, that these changes have been for the good, although I daresay some yearn for simpler times when life was less complex, commercial and more meaningful on a personal level. That the world is different does not mean it has completely changed. Greed, a thirst for dominance and war tenaciously persist.

HISTORICAL CHANGES IN THE TAX LAW

While “foolish consistency is the hobgoblin of little minds” (Ralph Waldo Emerson), too much change to fast can overload a system. The band Integrity writes: “Systems, overloading, fear envelopes me, Cry out for redemption, blind, forgotten – seen.” (From song “Systems Overload”).

On the tax front, Congress has passed and presidents signed 52 tax acts since 2001 with 10 tax bills being enacted in 2010 alone (some tax acts are inserted into larger non-tax legislation). In 1969 and 1986 there were Tax Reform Acts that restructured the Internal Revenue Code in many respects. Since 1969, there has been at least one major tax act signed into law every year. The tax law changes enacted in 2010 were many and the tax extender compromise bill came late in the year. All of this legislation has dramatically increased the complexity of the tax law. The National Taxpayer Advocate in her 2010 Annual Report to Congress noted some areas of undue complexity in the tax law, some of which were:

1. 141 phase out provisions.

2. 130 penalty provisions

3. 11 separate incentives for educational savings.

4. 16 separate incentives for retirement savings.

5. The Alternative Minimum Tax.

6. Tax law sunsets (i.e., tax bills with a built in expiration dates as far off as to 2020 and as near as 2011).

As a result even IRS is having trouble implementing computer programming for the latest changes and has announced delayed processing dates for some tax returns such as returns with itemized deductions. Undoubtedly, tax professionals have difficulty absorbing and understanding the implications of this rapid-fire tax law change culture. A person exhibiting such frequent change might be viewed as manic depressive or having multiple personalities. Question: Is the tax law insane? Or, are we insane for allowing Congress to force upon us this annual “figure it out game”. Clearly, we desperately need relief from all of this needless complexity. Our governing body must learn to better balance anti-abuse measures aimed at the few against added complexity imposed on the many.

A POTPOURI OF CHANGES AFFECTING 2010 TAX RETURNS OR 2011 TAXES

Speaking about present tax law is like commenting on the position of clouds in the sky. By the time one looks up, the wind will have blown the clouds afar. Nonetheless, to help tax individual and fiduciary filers keep their sanity, I will enumerate some of the recent changes that impact the current tax filing season:

A. INDIVIDUALS:

a. Lower Bush tax rates extended until end of 2012.

i. 28% rate for collectables remains in effect.

b. No phase out for itemized deductions before 2013.

c. Continuation of some benefits that had been set to expire:

i. State and local sales tax deduction.

ii. Teacher’s classroom expense deduction.

iii. Tax free distribution from IRA accounts for charity.

iv. Higher education tuition deduction.

v. Self employed taxpayers can deduct health insurance both for income tax and SE tax purposes for 2010 only.

d. Another temporary fix enacted to prevent Alternative Minimum Tax from greatly impacting middle class.

e. The Making Work Pay Credit expires after 2010 and for 2011 only is replaced by a 2 percentage point reduction in the Social Security tax on employee wages that could be worth as much as $2,136 to a worker (or self employed person) earning at least $106,800.

f. The Medicare surtax imposed after 2012 on high wage earners (0.9% and investment income of high earners (3.8%) is timed to trigger when the Bush rate extender bill sunsets. Thus, whether it is eventually imposed will turn on negotiations in Congress and with the White House over tax policy going forward. The 2012 presidential election cycle makes the outcome very tenuous.

g. The tax on 2010 Roth IRA conversions may be paid in its entirety on one’s 2010 return or evenly over 2011 and 2012.

h. The IRA maximum contribution remains at $5,000 with an extra $1,000 allowed for those eligible (over 50) for catch up contributions.

i. The 401(k)/ SEP limits are $16,500 and catch up contribution of an extra $5,500.

B. ESTATE, GIFT AND GENERATION SKIPPING TAXES:

a. The estate tax which had been repealed for 2010 is restored for decedents dying after 12/31/2009 and before 1/1/2013 with top rate of 35% and $5 million exclusion amount.

b. The new law allows either spouse to utilize the full exclusion amount available to both (portability).

c. Decedents dying in 2010 can elect no estate tax and modified carryover basis or the new law and full step up in basis to the estate tax value.

d. The gift tax is unchanged for gifts made in 2010 (35% top rate and $1 million exclusion) and unified with the estate tax rate and exclusion for gifts made after 2010.

e. Generation skipping transfers made in 2010 will be subject to a zero tax rate and $5 million exemption; after 2010 and before 2013, transfers are subject to a tax rate of 35% and exemption amount of $5 million.

As for these temporary measures, Margaret Mead said, “It may be necessary temporarily to accept a lesser evil, but one must never label a necessary evil as good.”

OTHER CHANGES NOT DISCUSSED

Many legislative changes such as accelerated expensing affect businesses. Additionally, IRS has been busily issuing rulings, regulations and other forms of guidance regarding how it intends to administer the tax laws. The Tax Court and other federal courts hearing tax cases have also not closed up shop and many judicial decisions interpreting tax provisions have been decided in 2010. On top of all of this change The House of Representatives is considering a bill to repeal President Obama’s health care act (which will die in the Senate) while a bipartisan Presidential Commission has proposed a sweeping overhaul and simplification of our tax code. Yet more change is clearly in the air. What form these new changes will take, given the political atmosphere, is anybody’s guess. Still the Commission’s report is helpful because, as baseball player and coach Yogi Berra said, “If you don’t know where you are going, you might wind up someplace else.”

CONCLUSION

Change is unavoidable as Henry Wadsworth beautifully wrote:

Nothing that is can pause or stay;

The moon will wax, the moon will wane,

The mist and cloud will turn to rain,

The rain to mist and cloud again,

Tomorrow be today.

Kabbalah teacher Rav Philip J. Berg says of people: “Change is what happens when the pain of staying the same is greater than the pain of changing.” Perhaps the tax law has its own life, and, like Franz Kafka’s character Gregor Samsa (The Metamorphosis), will in due time experience an unexpected moment of radical mutation.