The tax flux appears to be over.
On Monday evening, President Obama announced the outlines of the deal that had been reached between Republicans, who wanted to see the Bush tax cuts extended for all taxpayers — including the wealthiest — and Democrats, who wanted those tax breaks to expire for couples who make more than $250,000 a year and singles who earn over $200,000 a year.
The agreement taking shape would keep the Bush tax cuts in place for all taxpayers for two years, bringing the discussion back in time for the next Presidential election; extend unemployment insurance for 13 months; cut payroll taxes for all workers for one year; extend a slew of tax credits for middle-class Americans; and reinstate the estate tax at a higher exemption and a lower rate.
The end of the year is in sight. But with taxes still in flux, it’s easy to succumb to your own worst instincts and just block out all the noise: After all, how can you even think about your own year-end tax planning when you don’t know what the rules are, and may not know till after the end of the year?
“People can get paralyzed, and not take any action,” says Rich Kohan, principal of personal financial services at PricewaterhouseCoopers.
The last time this country had major tax reform was almost 25 years ago, in 1986. Could the national deficit commission’s proposals for tax reform result in major change, or will they end up consigned to the history bin of tax ideas that went nowhere?
As everyone knows, taxes are already in flux this year with the debate over whether to extend the Bush tax cuts or let them expire, and especially whether they should be extended for the richest Americans. But the tax issues under discussion—as hotly debated as they’ve been—are minor compared with the bold tax reform proposals released Wednesday by the national deficit commission co-chairs Alan Simpson and Erskine Bowles.
If you’ve been thinking of converting some of your retirement assets to a Roth IRA, rising tax rates are just one more reason to do it sooner rather than waiting till next year.
With a traditional IRA you pay taxes when you withdraw money, but with a Roth you pay those taxes when the money goes in. For those who think taxes will go up, and especially for those who expect to have substantial assets to pass on to the next generation, a Roth is a nice planning tool. That’s why when Roth conversions were opened up to those with modified adjusted gross income greater than $100,000 in 2010, financial planners and private wealth advisers urged many of their clients to make the switch.
The new rules on 1099 forms, which were attached to the health care bill and are set to go into effect in 2012, call for all businesses, no matter how small, to file 1099 forms for goods as well as for services. That sounds like a technicality, but it’s got small business up in arms.
Here’s why it matters, and what you need to know.
What exactly is the rule, anyway?
The new rule requires all business to file 1099 forms for goods as well as services, if those goods cost over $600 annually (the current threshold). It also gets rid of the distinction between corporations, which previously did not need to receive 1099s, and unincorporated entities, which did. The rule is slated to go into effect in 2012.
In the big tax fights of this year, the coming changes to who must get 1099 forms would hardly seem to rate. But for the vast majority of small businesses, these new rules will hit far harder than the estate tax, despite political posturing on that front.
The new rules on 1099 forms, which were attached to the health care bill and are set to go into effect in 2012, call for all businesses, no matter how small, to file 1099 forms for goods as well as services, if those goods cost over $600 (the current threshold). It also gets rid of the distinction between corporations, which previously did not need to receive 1099s, and unincorporated entities, which did.
When you think about what the outcome of the highly political battle over the estate tax might be, just remember: Last year’s common wisdom that lawmakers would not allow the estate tax to expire for one year proved wrong. Even after the deaths of billionaires including George Steinbrenner; Janet Morse Cargill of the family that founded Cargill; Texas pipeline magnate Dan Duncan; and California real estate mogul Walter Shorenstein, the gap year has continued without any clarity.
Talk to estate attorneys and advisors and they laugh at their own predictions for the estate tax, whether past or future. With so many competing proposals, and heated rhetoric on both sides, it’s hard to see what will happen in the 13 weeks remaining till yearend. “It’s been an experience not unlike the market experience, where fear has taken hold and analytics have taken a backseat,” says Frank Dubreuil, national managing director at Bernstein Global Wealth Management in San Francisco.
Nothing is certain except death and taxes, so the saying goes. But today, with tax rates in flux after yearend, and daily pronouncements from lawmakers — now back from summer recess — about what should happen, uncertainty reigns.
Will the Obama Administration win its battle to extend the Bush-era tax cuts for the middle class (read: couples who make $250,000 or less, and singles who earn $200,000 or less), while allowing them to expire for the wealthy?
Will the Republicans win in their efforts to have all of those tax cuts extended for everyone, including the well-heeled?
Will gridlock mean that the tax cuts simply expire?