The next few posts will provide information about income taxes for 2012 and beyond. While what will actually happen is uncertain at this time, the potential changes are quite significant to your bank account.
Uncertainty Grows Over Fate Of Bush-Era Tax Cuts
The year 2012 began with the fate of the Bush-era tax cuts uncertain, and no resolution appears in sight. Democrats and Republicans remain far apart on whether to extend all or some of the Bush-era tax cuts and other tax incentives scheduled to sunset after 2012. Two years ago, President Obama and the GOP agreed to extend the Bush-era tax cuts along with the so-called tax extenders in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act). Today, prospects for any agreement between Democrats and Republicans before the November elections are murky at best. The likelihood of a lame-duck Congress deciding the fate of the Bush-era tax cuts increases daily. Also growing daily is the uncertainty many taxpayers face in tax planning for 2013 and beyond.
The Congressional Budget Office (CBO) has estimated that extending all of the “Bush-era” tax cuts would cost $2.84 trillion over 10 years. Unlike 2010, Congress is now confronted with mandatory reductions in federal spending under the Budget Control Act of 2011 (2011 Budget Control Act), which the CBO has estimated will total approximately $109 billion per year starting in January 2013. Moreover, the 2011 Budget Control Act provides for enforcing the spending limits through sequestration. This added demand on resources, together with a still-fragile economy and a ticking clock on entitlement reform, is creating what has been termed a “fiscal cliff” by some, and “taxmageddon or “taxopocalypse” by others. By any name, they present difficult choices for Congress.
The “Bush-era” tax cuts is the collective term for the tax measures enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). In addition to the individual, capital gains, dividends and estate tax rates that remain the focus of the attention, EGTRRA made over 30 other major changes to the Tax Code, which are now about to sunset. The 2010 Tax Relief Act extended all these measures through 2012. EGTRRA also made many changes to retirement and pension rules in the Tax Code. These changes were made permanent by the Pension Protection Act of 2006 (PPA).
Rather than just waiting for Congress to act, taxpayers should consider implementing certain protective tax strategies now. To maximize benefits, advance planning that considers a number of “what ifs” should be undertaken soon. With budget pressures looming, the likelihood that all EGTRRA and JGTRRA expiring provisions will be rolled over for one or two more years into 2013 and 2014 is highly unlikely. Therefore, a strategy that accelerates into 2012 whatever tax benefits are now available deserves careful consideration.