Tax and financial planning in 2012: betting on the house?

• Author: Sarenski, Theodore J.

SINCE MANY TAX PLANNING ARTICLES FOCUS on providing year-end tax advice and planning techniques that may be effective only under certain assumptions about control of Congress and the presidency, some of the time-tested strategies that may benefit taxpayers regardless of the outcome of the election have fallen through the cracks.

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Tax professionals offering tips based on possible legislation are essentially gambling and "betting on the House" (and the Senate and the presidency). However, it may behoove tax and financial professionals to avoid the urge to bet on the House and to simply focus on some traditional tips that have withstood the test of time. By doing so, professionals can increase the odds of providing beneficial and effective tax financial planning advice during these uncertain times.

This column reminds advisers of those tips that may be beneficial regardless of what plan is in place in 2013--keeping in mind that effective tax planning advice should ultimately be tailored to each client's current financial situation, tax bracket, and other key personal factors.

The Current Status

Congress extended the majority of the so-called Bush tax cuts to Dec. 31, 2012, through the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. But at this writing, no one could predict with any certainty whether those cuts will be extended into 2013 and beyond. Therefore, many advisers have been preparing their clients for a potential return to the "pre-Bush tax cut era" under which:

* Qualified dividends could be taxed at ordinary income rates;

* Ordinary rates could be substantially higher (with the highest bracket increasing from 35% to 39.6%);

* Capital gain rates could increase; and

* The current gift and estate tax provisions may expire, resulting in higher gift and estate tax rates and a reduction in the lifetime exclusion from $5.12 million to $1 million.

This potential reality has created a major planning conundrum for tax professionals, who are not only wondering whether the cuts will be extended, but are also attempting to combine with them the effects of certain provisions of the Health Care and Education Reconciliation Act of 2010, P.L. 111-152, (the Act) that are scheduled to be implemented in 2013.

The provision of the Act garnering the most attention among tax professionals is its 3.8% net investment income tax for high-income taxpayers. This tax is imposed for tax years beginning after Dec. 31, 2012, on net investment income, which includes capital gains, rents, dividends, annuities, royalties, and gross income from any other investments not...