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YEAR-END TAX PLANNING WORRYING!

We are nearing the close of another year. The merriment of holiday cheer is occasionally interrupted by thoughts of saving some taxes before year-end. Traditionally, this process of reviewing what has been done and what might be done is called year-end tax planning. This year it’s more like the Bacharach-David song laments, “Wishin' and hopin' and thinkin' and prayin'” that things will turn out good; but, knowing that wishing and hoping won’t make congress function as it should.

The Super-committee failure was in large measure also a failure at failing because the committee did not issue a report that would enable congress to easily pick up the track of its negotiations and start from there. We are left with great uncertainty about the structure of our tax system which oils the wheels and levers of our economy. We are left wondering if several economic stimulus measures will be extended and whether the Medicare system will implement draconian reimbursement reductions that could impact availability of care.

Thus, attempting to compare tax results in 2011 with projected tax results in 2012 or 2013, after contemplated tax moves, is like playing a game of chess with eyes blindfolded. Below is a chart of some expiring tax provisions and prospective tax rate changes that may or may not ultimately become effective, depending on what congress takes up for consideration and is able to accomplish before year-end.

UNCERTAINTYOF EXPIRING TAX BENEFITS AND END TO BUSH ENACTED LOWER TAX RATES:

SOME OF THE ITEMS AFFECTED-

ENDS AFTER 2011 ENDS AFTER 2012 BEGINS IN 2013

Soc. Security 2% tax cut for employees (lowers rate to 4/2% on taxable wages) Top tax rate 35% (new top rate 39.6%) 3.8% surtax on net inv. Income (joint over $250K/ single over $200K)

AMT tax patch protection Cap gains rate 15% (new rate 20% / 28% collect.) Personal exemption phase out

Faster asset write-offs Qual. Div. rate 15% (new top div. rate 39.6%) Limit of itemized deductions of high earners

State sales tax deduction $5 mil estate & gift tax exempt. & rates (new-?) Reduced flexible spending ac limit of $2,500.

$500 home-energy credit Am. Op Edu. Credit

> Conserv. Easement ded.

Mort. Ins. premium ded.

$4K higher-ed. Deduction

$250 teacher expense deduction

Ability to donate to charity from IRA for those >701/2

ADDITIONAL UNCERTAINTIES TO WORRY ABOUT

On top of all of this tax business left undone, other questions abound:

SHORT TERM WORRIES:

 Will congress extend expiring long-term unemployment benefits for the legions of unemployed Americans? If not, by next year’s end, about 6 million Americans would loose weekly checks averaging about $300, for most, their main source of income.

 Will congress enact another so-called “doc-fix” and prevent slated drastic Medicare payment reductions to doctors that could seriously impact care for the elderly.

 How will the cost basis reporting set to begin in 2011 work and what will be the revenue impact? Brokers should offer customers a choice of cost reporting methods: FIFO, LIFO, Highest cost or Specific ID. Absent a choice FIFO (First-in/ First-out controls). The difference is in timing of gain reporting and which method benefits most may depend as much on market performance as tax planning.

 Will the Supreme Court uphold Obama care? If the Affordable Health Care Act is found all or partially unconstitutional many tax rules will be upended.

 Will portability be retained in the final estate and gift tax rules?

 Will congressional conservatives spend great energy trying to rescind the automatic military spending cuts to begin in 2013? The President says he will veto any bill including a roll back provision but other important matters could be pushed aside in the battle.

LONGER TERM WORRIES:

 Will the dollar’s attractiveness be impacted if congress irresponsibly keeps shirking responsibility for the business of governing? The dollar has remained strong only because the Euro-zone currency is near collapse and growth in developing regions has subsided with inflation rising and political instability swirling all around the world. These same circumstances have also kept U.S. sovereign debt borrowing costs extremely low. Should investors demand higher yields on U.S. debt, budget difficulties will be exacerbated.

 Will Social Security, Medicare and Medicaid reformers reach a compromise that continues to protect seniors and the poor from hardship, while providing sound long term benefit formulas, funding and financial stability for these important social safety nets?

 Will tax reformers produce a tax code that is flatter, simpler and fairer, retaining its progressivity, that the income gap between the few richest and growing ranks of poorest Americans is narrowed?

 Will congress find common ground to create higher paying jobs and stem the decline in middle class lifestyle as average real wages have declined 7% from 2000 thru 2010?

 Will our system of economic rewards be adjusted to be more commensurate with value added to the economy (e.g. Steve Jobs) and to discourage manipulative monopoly-like activities that do not add value?

 Will our banking system return to core banking and move away from speculative activities with profits privatized but losses socialized?

 Will congress overcome labels and slogans and reform our immigration system to create realistic visa quotas and temporary worker status to fill our economy’s labor needs?

 Will congress be able to reign in spending, amidst these other necessary goals, that our financial standing, as the bulwark of world stability, is restored?

THE ECONOMY IS STILL LIKE A BOMB / THE TIME FUSE HAS STOPPED BECAUSE TWO SMALL WIRES SEPARATED/ BUT THEY ARE CLOSE TO EACH OTHER

The fragile state of our recovering economy makes achieving the above goals more tenuous. While the media strikes up the band at every flimsy bit of positive economic news, innovation will be the driver that gives birth to accelerated GDP growth. Without the next Apple, growth will remain sluggish and unemployment will remain high. High unemployment means that the housing market will languish and retail sales will not grow at levels seen before the Great Recession. Foreign speculators, unable to immigrate here due to our rigid quotas, are not a foundation on which to build a solid housing market recovery. Exports will not drive the economy because the European debt crisis has spawned a global malaise. The big banks are still speculating, subjecting the financial system to risk, and working to ward off the Dodd-Frank restrictions on speculative trading. The retirement of Barney Frank will hinder the fight to resist this push-back. Ultimately, the budget deficit will be addressed with both spending cuts and measures (higher tax rates and fewer tax incentives) to raise additional revenue. Despite all of the talk about taxing the rich, oil companies and banks, the bulk of additional revenue will come from the middle class because that’s where the bulk of tax money resides. That inevitability further reduces the prospect of a return of consumer spending to pre-recession levels. Don’t place too much weight on month to month economic reports or stock market swings. That stock prices surged upwards because the Federal Reserve agreed to add liquidity to world banking coffers is evidence of an irrational market. While this move creates some short term breathing room for European banks, its necessity tells just how serious is the European sovereign debt crisis. This revue may sound bleak and there is much to worry about; but, I am pessimistic only if congress continues to behave like a classroom full of pre-K children, each child screaming “mine” or “I want that.” See “A Primer on the Sub-Prime Mess,” Steinberg Talks Tax™, Vol. 2, No. 3 (October 3, 2008) for a broader more optimistic appraisal of why I still believe the future is bright for America if we can overcome congress.

A SHOT ACROSS THE BOW?

We recently experienced two remarkable events: On Tuesday November 8, an asteroid the size of an aircraft carrier cut across the path of the moon’s orbit of earth. Cosmologically speaking, it was a near miss and near calamity. Was the event mere coincidence or a cosmic warning, a message from a higher life form from distant space? The asteroid brought to mind the film “The Day the Earth Stood Still” (1951) directed by Robert Wise with stars Michael Rennie, Patricia Neal and Sam Jaffe, in which a alien visitor comes to Earth with a powerful robot Gort and a warning: cease our aggressive warring or face annihilation. Just A few days later the sun rose on 11/11/11, said in numerology to represent a powerful master number. It is a day said to be burst with promise, a harbinger of peace, harmony and prosperity. These two events highlight the choice we face as a nation: Lubricate our politically rusted wheels of government with some compromise or slowly decline gradually becoming less and less of the stuff our founders dreamed this country would become.

Recently I started reading Ian Frazier’s fascinating book “Travels in Siberia.” In one vignette he is being shown around the home of a bottler of mineral water and writes:

In this respect (as in many others) Siberia and America are alike. Apart from their actual physical selves, both exist as constructs, expressions of the mind. Once when I was in western Russian, a bottler of mineral water was showing my two Russian companions and me around his new dacha outside the city of Vologda. The time was late evening, darkness had fallen. The mineral-water bottler led us from room to room, throwing on all the lights and pointing out the amenities. When we got to the kitchen, he flipped the switch but the light did not go on. This seemed to upset him. He fooled with the switch, then hurried off and came back with a stepladder. Mounting it, he removed the glass globe from the overhead light and unscrewed the bulb. He climbed down, put the globe and bulb on the counter, took a fresh bulb and, and ascended again. He reached up and screwed the new bulb into the socket. After a few twists, the light came on. He turned to us and spread his arms wide indicating the beams brightly filling the room. “Ahhh,” he said triumphantly, “Amerika!”

Yes, America, where everything works. That was our reputation, innovative, efficient, an economic and democratic beacon of light for the world to emulate. Now, the world is not so sure about us. We look less like a country that knows what it is about and more like the Keystone Cops or Laurel and Hardy attempting futilely to move a piano up stairs (in 1939 film “Swiss Miss”) Laurel exclaiming, “Well, here's another nice mess you've gotten me into, Stanley!” Yet, it is not so hard to figure out what must be done. In a recent Pickles comic strip (by Brian Crane, Sunday, 11/27/11) Earl is playing checkers with his friend and says:

Earl: “Do you ever walk into a room and forget why you came in?”

Friend: Oh, yeah. All the time.

Earl: It’s annoying, isn’t it?

Friend: I’ll say!

Earl: It happened to me just yesterday. I walked into room and couldn’t remember what the heck I’d gone in there for. Then, I realized it was the bathroom. That kind of narrowed the choices down to one or two.”

Solutions to our problems may be elusive, but as Bertrand Russell said, “The greatest challenge to any thinker is stating the problem in a way that will allow a solution.” That has been difficult for congress to do. Conservatives say we must first cut spending while democrats like say we must first raise revenue. The roadblock is the words, “we must first.” Structurally, the problem is more broadly about how we think of government and private capital markets and how to redefine a relationship and balance between these two important sectors of our economy that growth can be planned rationally with enough but not too much government intervention.

WHAT YOU CAN DO NOW

First, recognize that tax planning cannot be generalized. Each person is uniquely affected by the complexity and interaction of the myriad provisions in an obtuse tax code. Thus, those serious about planning will make an appointment with their CPA or tax attorney to discuss their particular situation and possible planning. Listing eight, nine or ten savvy tax moves is not too helpful. Of course, you can: time losses, max your retirement plan contributions, convert a traditional IRA to a Roth, accelerate deduction or delay income, donate property to charity directly or though a trust, open a college savings plan or the like, but these are general statements having little worth without considering your specific situation.

One thing that some may be able to do and may be helpful is to file early. Wage earners not waiting for Schedule K-1s can usually file in early March, after Forms 1099 are received. Years past, preparers told filers with Forms 1099 to wait because brokers were amending Forms 1099 due to the complexity of classifying dividends. That still occurs sometimes but not as frequently. The benefit of filing early, apart from getting an earlier refund, is obtaining some protection from identity theft scammers who, upon stealing a Social Security Number, file bogus returns claiming refunds of withholding tax, after checking that no return has been filed. They get way with the scam because IRS does not immediately match Forms W-2 with amounts shown on your return. The matching is performed some months later.

DOCTRINE OF CHUTZPAH OR WHAT NERVE!

This congress asking to be re-elected is like the kidnapper in Kansas who recently sued his victims for breach of contract (Topeka Capital-Journal, November 30, 2011).

In closing I cannot resist offering another parody lyric from Taxfoolery.com. This lyric is to the tune of "I Guess I'll Have to Change My Plan" by Arthur Schwartz and Howard Dietz from the 1953 MGM musical film “The Band Wagon” featuring Fred Astaire.

I guess we’ll have to change the crew

Those at the helm, have overwhelmingly, no clue

They’re loading for another broadside

When there’s a perfect storm near due

We’re sailing on a leaky boat

And we could founder and go down, to stay afloat,

We’ve got to stow this rancor fouling D.C.

Set a course for some sanity.

By now you’ve caught the drift, my view

Throw overboard the whole damn crew.

ROBERT S. STEINBERG ATTORNEY, CPA, CVA
Articles and consultations authored by attorney reflect the state of law as of the date of their writing. The laws change daily. Users of this site are advised to consult attorney regarding their situation.
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