Election Results Leave Tax Law in Limbo


 

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Election Results Leave Tax Law in Limbo

 

President Obama’s reelection and a Congress that will continue to be divided when it’s sworn in early next year have left a great deal of uncertainty about the tax law changes scheduled for January 1. What’s certain, however, is that compromise between the two parties will be necessary to get any legislation passed and signed into law.

The Tax Impact

As it stands now most income tax rates are scheduled to increase in 2013, and many tax breaks are set to expire. In addition, several valuable tax breaks that expired at the end of 2011 have yet to be extended. Without congressional action most taxpayers will face higher tax bills next year.

Yet, as spelled out in the recent campaigns, Democrats and Republicans have different views on how these expiring rates and breaks should be addressed.

For example, the president has proposed retaining 2012 rates for only the middle and lower brackets—that is, taxable income below $200,000 for single filers, $225,000 for heads of households, and $250,000 for married couples filing jointly ($125,000 for separate filers). Republicans generally want to extend 2012 rates for all taxpayers and eventually reduce rates as part of overall tax reform.

Further complicating matters are the automatic spending cuts scheduled to go into effect in 2013 under the Budget Control Act of 2011, which was passed as part of a deal to raise the debt ceiling. The cuts would dramatically reduce spending on both defense and domestic programs—an outcome that is undesirable for both parties.

To address the coming fiscal cliff (the combination of the expiring tax rates and breaks and the scheduled spending cuts), the president will likely have to work closely with both his own party and the Republicans, and both sides will likely need to make some compromises.

The Outlook

Given the level of discord in Washington during the last four years and the lack of significant change in the congressional makeup for 2013, achieving the compromise needed to address the fiscal cliff could be a challenge. But the enormity of the potential impact of what will happen without new legislation signed into law provides an incentive for Congress and the president to find a solution.

What is the potential timing of legislation? The lame-duck Congress is expected to return briefly next week before breaking for Thanksgiving. It’s possible that some tax legislation could be passed in December, which would be beneficial because it would allow enough time to implement appropriate year-end tax planning strategies. But given the time it could take to reach a compromise, it may be more likely that no tax legislation will be signed into law until next year, likely retroactively extending at least some 2012 rates and breaks.

We're Here to Help

With today’s tax law uncertainty, the best thing you can do now is be prepared for various scenarios so you can quickly implement year-end tax planning strategies once either tax legislation is passed or it becomes clear that there will be no movement until next year. If you have questions about year-end tax planning strategies, please contact your Moss Adams LLP professional.


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