This year, tax advisers agree, was benign in terms of changes to the Internal Revenue Code. But that comes after two tumultuous years. In 2009, tax preparers waited nervously for action on the expiring estate tax that never came. Then, in late 2010 came a jumble of unexpected tax actions: from reinstating the estate tax for this year and next, with a higher exemption level than most tax advisers expected, to extending the Bush-era tax cuts for two more years.
So how to handle these last few weeks of the tax year? As is true every year, taxpayers should run a checklist for everything from selling securities that have lost money to taking advantage of annual gift allowances.
But even then, seemingly straightforward deductions are not always so. The $500 energy tax credit, for example, limits the amount you can deduct for new windows to 10 percent of the value up to $200. In other words, you had to spend $2,000 on windows to get the full window credit.
And charitable deductions can be more broadly defined to include costs incurred while volunteering, said Mark Steber, chief tax officer at Jackson Hewitt, a tax preparation company. “You can’t deduct the value of your time, but you can deduct your out-of-pocket expenses,” he said.
But beyond the usual recommendations, the tax advisers I spoke to stressed that you should use this year to get your affairs in order for what promises to be an uncertain two years of tax policy.
“For high-net-worth individuals, chances are the next year or so is going to be a challenging time,” said Chris Johnson, head of United States wealth advisory at Barclays Wealth. “There is going to be a lot of attention focused on ways to extract additional tax dollars.”
If Congress does not act to extend a series of smaller tax deductions, next year could be costly for middle-income taxpayers as well. Here are some of the more pressing issues to consider.
WHAT MAY EXPIRE AFTER 2011 Every year Congress passes a series of so-called patches, renewing some 70 tax breaks for another year or two. In the past, this has been a formality, much as raising the debt ceiling used to be. This year, it remains to be seen what Congress will do.
Mark Luscombe, principal federal tax analyst at CCH, a publisher of research and software for tax lawyers and accountants, noted that when these patches expired in 2009 and were re-enacted retroactively at the end of 2010, the delay wreaked havoc with tax planning.
The deductions vary. Teachers, for example, can deduct $250 toward classroom expenses.
Other patches affect broader swaths of the population. One allows residents to choose between deducting state income and sales tax against their federal tax. This is a favorite of people in states like Florida and Texas that have no state income tax.
In high-tax states, the big worry is what happens to the alternative minimum tax, a parallel system of taxation that cancels out many deductions. The A.M.T. was originally meant to keep wealthy people from paying too little in taxes. Because it was not indexed for inflation, however, Congress has had to approve periodic fixes to keep it from affecting many more people than intended.
Without a fix next year, Stephen A. Baxley, director of tax and financial planning at Bessemer Trust, said, the A.M.T. “will hit an additional 20 million people, and most of them are middle-income taxpayers.” It normally claims around four million taxpayers.
Two of the big triggers for the A.M.T. are high state taxes on property and income, which hits residents of New York, New Jersey, Connecticut and California disproportionately, said Alfred Peguero, partner in PricewaterhouseCoopers’s private company services practice.
For older people, there is again a chance that the provision allowing them to directly donate the required minimum withdrawal from their retirement account to charity may be delayed or not renewed. Currently, people over 70 1/2 can donate up to $100,000 to charity. If this patch were to disappear, the federal income tax on the withdrawal and the charitable deduction would cancel each other out. But some states do not allow charitable deductions above a certain income, or at all.
“Higher taxpayers have their itemized deductions reduced in New York,” Mr. Baxley said. “In Connecticut and New Jersey, you don’t get any benefit from itemized deductions.”
WHAT CHANGES IN 2012 There are several provisions that take effect or lapse regardless of Congressional action.
One set to start in 2012 is a requirement that brokers report the purchase price on mutual funds and exchange-traded funds to the Internal Revenue Service for capital gains purposes. (They began doing this for stocks this year.)
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