The end of the year means continuing education for America’s accountants, as they cram to get up to speed for the upcoming tax season. It also means helping clients make end-of-year financial decisions. And now, thanks to Congress, the nation’s CPAs have another item on their to-do list: watch the news.
The potential tax changes from the so-called fiscal cliff are helping to make 2012 tax paperwork look more and more daunting to accountants.
“It’s especially hard this year because we don’t know exactly what the rules will be come next year,” says Edward Karl, vice president of taxation at the American Institute of CPAs, a trade group representing accountants. “I think the big priority this year is to stay connected to the news and follow developments over the lame-duck session to try to make final decisions.”
The biggest worry for many accountants right now is the alternative minimum tax patch. The AMT was originally instituted to ensure that high-income taxpayers could not avoid paying taxes by taking advantage of too many deductions and other breaks. In recent years, Congress has regularly put a “patch” in place, greatly limiting the number of people who would pay the tax. In 2011, around 4 million paid the AMT, according to the Tax Policy Center. More than 31 million will be subject to that tax in 2012 if Congress does not act. The IRS has been operating under the assumption that the patch will happen, but every day that passes without the patch extended, the more worrisome 2013’s tax season looks.
“The IRS has written their programs expecting the AMT patch to happen, and if it doesn’t, everything has to get reprogrammed. That’s going to cause a delay in when people file tax returns,” says David Brauer, a partner in the tax department at Lurie Besikof Lapidus & Company, an accounting firm in Minneapolis, Minn.
In other words, Congressional delays could mean a crunch for accountants as they wait for forms and programs to be finalized, and then cram a few months’ work into the time they have left before filing deadlines. IRS Acting Commissioner Steven T. Miller expressed this worry in a letter to the heads of the House Ways and Means Committee and the Senate Finance Committee earlier this month, explaining that a failure to act on the AMT or a number of other provisions known as “tax extenders” could significantly delay both the filing season and the payment of refunds in 2013. He pointed to several such tax provisions that expired at the end of 2011, like a deduction for state and local sales taxes and a deduction for teachers’ out-of-pocket classroom expenses.”What that means for us is we sort of can’t do anything or it’s going to bunch all the work,” says Bill Smith, managing director at the national tax office for accounting firm CBIZ MHM. “Not only does the IRS have to update all of its forms and all of its software, but there are only a couple of major tax preparation service software providers for the big accounting firms, and they’re going to have to do all their software upgrades, too.” There’s no way to know for sure how long that will take, he says.
All of this has created an unprecedented level of confusion, says one expert.
“I’ve never even gone into teaching season, which is after October 15, without being able to show my students what the form for [the upcoming year] looks like. How do you prepare people if they can’t even see the form?” says Vern Hoven, a CPA who also leads tax seminars around the country.
Though there’s plenty of uncertainty surrounding tax rates and provisions, it does seem relatively likely Congress will extend the AMT patch, rather than subjecting millions of Americans, including some in the middle class, to higher taxes.
Of course, plenty of the uncertainty surrounding taxes has nothing to do with what the forms look like. Rather, accountants must now rethink what was once considered ironclad advice.
“One of the tax mantras was always, ‘Defer, defer, defer,'” says Brauer. “Now all of a sudden, the question is for the first time ever you really started talking to people about accelerating income instead of deferring it.”
For example, someone who sold a piece of property for $450,000 this year may want to claim all of that income for 2012, even if all of that money is going to come in installments over the course of a few years. Paying taxes on that income now means avoiding next year’s tax hikes, even if those hikes are not yet set in stone.
“I don’t know what the rates are going to be next year, but the one thing I absolutely know is they won’t be lower,” says Ron Roberson, a CPA who teaches seminars with Hoven.
One area where those taxes are set to go up the most is in dividends. While income tax rates may increase by a few percentage points for any given bracket, tax rates on dividends for the highest earners are currently scheduled to jump from the current 15 percent to as high as 43.4 percent on January 1.
That makes some investments suddenly look much less attractive, meaning that accountants and their clients have to adjust what they have recently considered smart places to park their money.
The messiness doesn’t end with April 15, 2013, Hoven points out. He says the healthcare reform act’s employer mandate is perhaps the biggest area of uncertainty looming next year, as employers navigate the rules governing their responsibilities (not all of which have been firmly laid out). With the mandate going into full effect in 2014, Hoven is hoping that these uncertainties are ironed out sooner rather than later.
All of this ongoing confusion in the tax code, says Smith, turns a centuries-old adage on its head: “The only thing that’s certain remaining is death, because we’ve taken certainty out of taxes completely,” he says.
Source: US News & World Report