SYMPOSIUM SPEAKER – October 21, Jack Surgent

Presentation Scheduled for Tuesday, 3:15 pm
Pending CE: 2 MN insurance
Approved CE: 2 CFP, 2 NASBA/CPE, 2 WI insurance, 2 CIMA, 1.75 CLE Stnd
2 hours of ND insurance is available if also attending Two Schools of Thought on Retirement Income and 2014 Economic Overview (Total 6 hrs)

Tax Strategies and Planning in Light of Higher Taxes

Tax reform is in the air, as both sides – the Administration and the House Republicans in the Ways and Means Committee – have issued tax proposals. While in many surprising ways they agree in many more areas than might be supposed, partisan politics in an election year point to a late-November/early-December legislative window for changes, if any, to be enacted.

The Administration proposal aims at increasing or extending low- and middle-income tax breaks, while limiting the tax benefit of credits and deductions that can be enjoyed by upper-income taxpayers. The House proposal does provide for a reduction of tax rates but goes far beyond the Administration in repealing many popular deductions, such as qualified residence interest, or exclusions, such as the value of employer-provided health care or gain recognized on a like-kind exchange. Some of the disagreements, however, are reversals of what some would anticipate: for example, the Administration to reinstitute retroactively and make permanent the 100-percent exclusion of gain recognized on the sale of qualified small business stock, while the House would repeal the provision completely.

Some areas of surprising agreement are the repeal of oil and gas percentage depletion and the deduction of intangible drilling costs, the two tax breaks that lie at the heart of the financing of production of these energy sources. Inventory accounting would change under both proposals by elimination of LIFO and the write-down to lower of cost or market.

Meanwhile, temporary provisions that are enacted (and often extended) with a limited time frame of application are yet again under scrutiny for possible extension (and in many cases, resurrection). By this time everyone knows the routine: provisions technically expire at the end of one year (in this case 2013) but the Congress near year-end of the following year (in this case 2014) passes an extender bill that retroactive to the beginning of that year reinstates the provision. While the Congress pretends such provisions remained in effect without break, the reality is that taxpayers do not take these tax-favored actions before they are actually passed. Business clients will not take advantage of a $500,000 expensing limitation that was $25,000 at the beginning of the year before enactment, which, as noted above, generally occurs late in the year creating a fire drill of tax maneuvers in a short period of time. Advisers have to send out advisory letters and work with clients affected to take advantage under pressure. This year will likely have a similar destiny.

The Congress passed the American Taxpayer Relief Act of 2012, which among other things ended the cycle of temporary extensions of the Code. The Pension Protection and Affordable Care Act of 2010 and related legislation were vindicated by the Supreme Court’s holding that the individual mandate was a constitutional tax. The results of these events will dominate planning in 2013 and beyond.

Last year exposed taxpayers and practitioners to the effects of the net investment income tax. High-income and high-wealth clients are likely to be hit, and hit hard, by this tax without proper planning. Last year both tried to understand the import of the regulations, some of which remain in proposed form; this year the focus must be planning ideas that translate into tax savings.

But beyond both the uncertainty in current law and the adaptation to the issues arising from the NII tax, advisors must be sensitive to tactics and strategies that apply to many clients generally. Inter-family loans and transfers are particularly well-suited to an environment with low interest rates and higher tax rates on ordinary and capital gain income, both from the regular income and the net investment income taxes. Moreover, some exclusions, such as that for a principal residence, are subject to potential traps that can now produce even greater tax losses when transactions are not performed precisely.

The tax world seems to reinvent itself annually and planners must be familiar with the thorny tax issues and the ways to combat them. These will be explored in Tax Strategies and Planning in Light of Higher Taxes, presented by John M. Surgent.