Here we are less than six months away from the "fiscal cliff" and Congress shows little sign of pulling the country back from the brink.
The fiscal cliff is the result of the Bush-era tax cuts expiring at year's end combined with $1.2 trillion in mandatory federal spending reductions set to begin next year. If Congress doesn't act and lets these events unfold, economists say, the country will be thrown back into a recession.
But, level-headed readers might ask, won't lawmakers rush to prevent this from happening?
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These are some of the same politicians who brought the government to near default last summer, leading to a downgrade in the country's credit rating. And, later, they couldn't agree on reducing the deficit — triggering the draconian spending cuts planned for next year.
Many tax professionals don't expect Congress to act until after the November election. Even then, they say, action — fast or slow — will depend on the outcome of congressional races and on whether Republican Mitt Romney or President Barack Obama wins the White House.
"If Republicans feel strengthened by the election, they might continue to hold out for an across-the-board extension of the Bush tax cuts," says Mark Luscombe, principal tax analyst with CCH, an Illinois provider of tax information. "If Obama wins, unlike 2010, all indication is that Obama is not going to compromise again and do a temporary extension."
But all this uncertainty is unfair to those of us who must make financial decisions this year — with no idea where taxes are headed. Maryland accountants are hearing from frustrated clients.
"Small businesses would just like things to be left alone so they can catch their breath … and plan," says Robert Kober, a certified public accountant in Salisbury.
Clients ask for his prediction.
"It's really difficult to tell them what to do because nobody really knows," Kober says. "What I usually do is present my clients with their options, and they are the ones that have to choose."
Susan Jeter, a Lutherville CPA, says some of her small-business clients are doing well but are reluctant to hire because of the uncertainty. Instead, they have current employees work extra hours.
Lawmakers are "trying to scare people to get votes, but it's making them look like fools," Jeter says. "You don't threaten [people] with falling off the cliff; you just don't do that."
As difficult as planning is this year, tax professionals offer some strategies to consider:
Income tax rates Regular income-tax rates now are 10, 15, 25, 28, 33 and 35 percent. Next year, they're set to revert to 15, 28, 31, 36 and 39.6 percent.
The usual tax strategy is to postpone income into the next year and accelerate deductions into the current year. With tax rates possibly heading up, the opposite strategy might work this year.
One exception: The health care law raised the threshold for deducting medical expenses starting next year. You now can deduct expenses that exceed 7.5 percent of income, but next year that goes up to 10 percent for everyone except those 65 and over, says Joanne Gretz, a certified public accountant with Katz Abosch in Timonium.
So if you have been thinking about Lasik eye surgery or braces for the kids, doing it this year could increase your chances of meeting the deduction threshold.
Roth conversions Gretz says some of her clients are converting traditional IRAs into Roth IRAs, given the prospect of higher income-tax rates.
In a conversion, investors pay ordinary income tax on some or all of the money coming out of the traditional IRA. Once the money is invested in the Roth, though, it can grow and won't be taxed when withdrawn in retirement.