Q&A talks about the impending tax season with Brett McGrath, a tax partner in the Hartford office of Marcum Accountants and Advisors.
Q: Was the “fiscal cliff” legislation the biggest headache for CPAs in years? It seems as if accountants, bookkeepers, and business owners were scrambling during the holiday week to reconfigure payrolls. Was it like months of tax work rolled into one week?
A: The uncertainty during 2012 over what tax laws would govern in 2013 due to the potential expiration of the Bush-era tax cuts made year-end tax planning a very challenging time. The volume and unprecedented amount of tax related issues, coupled with the tax provisions that take effect Jan. 1, 2013 as part of the Affordable Care Act, put pressure on tax professionals to make clients aware of these issues and propose plans of action that would be beneficial for them. Contrary to the usual year-end tax advice, in anticipation of the income rate increase, we were advising our clients in some situations to accelerate income or defer deductions so they could benefit from the potential lower rates in 2012. Another challenge involved estate and gift tax planning as the lifetime exemption was scheduled to drop from $5,120,000 to $1,000,000. For people with significant estates, November and December was a very good time to take the appropriate steps. However, these transactions are complicated and require tough decisions, which further added to the pressure that CPA’s and other professionals endured at year end.
Q: What should people know about alternative minimum tax? What’s been done to the AMT and who benefits and suffers because of it?
A: Thanks to the fiscal cliff deal, the alternative minimum tax will not ensnare tens of millions of middle-class Americans for whom it was never intended. The American Taxpayer Relief Act of 2012 raised the income thresholds before the AMT kicks in and indexes them for inflation going forward. As a practical matter, this means that 28 million filers who would have had to pay AMT tax on their 2012 returns have been spared and are much less likely to have to pay the tax in the future.
Q: Are there clear-cut winners in this new legislation? Who are they? What did they win?
A: Middle and lower income taxpayers are the big winners and there are three reasons:
1. Bush-era tax cuts are permanently in place for individuals with taxable income of less than $400,000 and families with taxable income of less than $450,000.
2. The AMT patch will prevent around 30,000,000 taxpayers from paying more in taxes.
3. One-year extension of federal Emergency Unemployment Compensation through 2013. This means that unemployment compensation will continue for unemployed workers who are currently collecting federal jobless benefits.
Q: What do the new tax policies do to tax planning? Does its passage make things simpler or more complicated for business and individuals? Why?
A: We now have certainty regarding the tax laws which helps make tax planning decisions, but the process has become more complicated because of the interplay among several factors such as AMT, the rate difference between dividends and capital gains, pension provisions, and the various phase outs to itemized deductions and personal exemptions. In addition, the imposition of the new Medicare tax of 3.8 percent on net investment income has become a very hot topic and guidance on the rules were delayed until the end of November. It is impossible at times to project the impact of a general scenario with any precision. Each taxpayer’s situation is going to be unique because of all the variables involved — the complexity is more pronounced now.
Q: Some believe policy, including tax policy, is presented to achieve a desired effect. Is the desired effect of the “fiscal cliff” legislation to promote single, as opposed to married, taxpayers? Hypothetically, as some have suggested tongue-in-cheek (or maybe not), are you better off getting divorced?
A: If tax policy is intended to produce a desired behavior, then the government is sending a clear message that they want you to be single vs. being married. Based upon the income tax thresholds that have been set, you’re better off getting a divorce — you’ll save a lot of money.
Q: Increased revenue is important to the federal government. What steps do you recommend your clients take in light of the fiscal cliff legislation to help protect corporations? Are there new shelters built into the new law?
A: Now that the focus is on spending cuts, corporate tax reform will certainly become more prevalent as the federal government looks for new revenue streams. Other taxes such as a value added tax may be considered. It will be interesting to see how corporate tax reform comes into play as we get closer to the remaining cliffs — the debt ceiling, deficit reduction and federal spending cuts.
