And why 2012 tax planning can’t wait for year-end.
The recent standoff in Congress over the fate of the payroll tax cut is a pretty good indication of what 2012 will have in store for financial planners. No compromise was reached going into the holiday season, so Congress decided to “Patch & Postpone” yet another important tax matter. We will now have to wait until the end of February for chapter two of this drama.
Patch & Postpone has been their formula for dealing with the Alternative Minimum Tax (AMT) for the past decade. The last patch was part of the Tax Relief Act of 2010 which postponed the increase until 2012 (see AMT Relief Ending, October 14, 2011). The AMT increase is now effective and we will most likely have to wait until after the elections in November to see if it will be patched again.
Tax planning will be especially difficult this year, because we may need to think differently than we have in the past. We have traditionally thought of ways to delay paying taxes by deferring income and accelerating deductions. This may not be the correct approach if tax rates increase in 2013, like they are scheduled to do. For those tax payers with incomes over $200,000 ($250,000 for joint filers), we also have to consider the new Medicare taxes that go into effect in 2013. You may need to plan for a big tax bill this year in order to lower your taxes in 2013.
Don’t put off tax planning for 2012 until the end of the year. Look for ways to plan your income throughout the year to avoid a year end scramble. 401(k) elections, Roth conversions, and harvesting capital gains (or losses) should all be planned now to put yourself in the most flexible position for year-end. You will want to be able to take advantage of whatever tax rules make the final cut.