Crystal Ball Finance Beene Garter’s Claude Titche III: A gaze into the murky Crystal Ball of legislation
Order Reprints
Follow @MiBiz
Claude Titche III, CPA, Partner
Beene Garter Tax Planning and Preparation Services
The old joke of not wanting to watch sausage being made can be used as an analogy to what will likely happen with 2011 tax legislation. While you may choose to forgo the sausage, it will be nearly impossible to avoid the tax legislation. Even the door to giving up your citizenship and moving to a remote foreign location is closed as you now have to file an Estate Tax Return on the way out. For those of us who don’t wish to take such drastic action, here is what may be in store for your 2011 taxes.
Congress will extend the Alternative Minimum Tax (AMT) band-aid that will allow approximately 20 million Americans to avoid the AMT. Leadership of both parties have told the IRS that the fix will occur and the IRS does not have to use resources to change its systems. Taxpayers with taxable income over $100,000 will still be subject to the AMT.
The Bush-era tax cuts will be extended for 2011, giving Congress time to enact longer-term tax legislation. Democrats want to extend the benefits for individuals earning less than $200,000 and married couples earning less than $250,000. Republicans want to extend the benefits for all taxpayers. While all legislators are concerned over the budget deficits, there is still no comprehensive theory on how to balance the budget.
President Obama’s bipartisan debt reduction commission report will not persuade enough bipartisanship. However, it outlines many interesting ideas including:
The combination of ideas presented depicts what many of us already understand — a combination of income tax increases and spending reductions is the only realistic way to balance and reduce debt.
Estate tax legislation will allow a $3.5 million exemption, an automatic transfer of any remaining exemption at death between spouses and a question on future tax returns relative to any assets inherited during 2010. New legislation will ban certain forms of estate planning such as short-term Grantor Retained Annuity Trusts (GRATs) that allow transfers to taxable beneficiaries at a near-zero gift tax cost.
Revised and expanded Form 1099 reporting will be repealed. The hidden truth here is the size of the underground and untaxed economy. The problem with additional reporting is the huge cost involved and the inability to tie all this information into tax returns in a correct and timely manner.
Increased audits of small businesses with attention on worker classification, executive compensation, fringe benefits and payroll taxes will take place. For individuals, the new audits of high net worth individuals will be modified to allow the IRS to generate additional compliance and data generation without the (current) high cost of preparation and documentation.
The Health Care Reform Act enacted in 2010 will be gutted by the new Congress, and if Congress doesn’t make drastic changes, the courts may weigh in.
Overall there will be a great deal of discussion but minimal action on the tax front. This makes planning difficult, but with limited action, tax rates will probably stay where they are for 2011. While this may be bad for the economy, it will provide the lowest current tax model for individuals. Be sure to save now because taxes will have to rise in the future.