Accountants, advisers cautious on strategies as tax breaks remain elusive

Sometimes the best planning approach is to do nothing in an uncertain environment

Dec 2, 2014 @ 2:30 pm

By Darla Mercado

With four weeks left in the year, tax experts aren't taking any chances on Congress arriving at a bill that will preserve the most popular tax breaks for clients.

Accountants and advisers have been awaiting the fate of some notable tax breaks for their clients. Provisions up for grabs include the qualified charitable distribution, which permits those over 70 to transfer a portion of their IRA to a qualifying charity free of tax while meeting required minimum distribution rules. That provision expired last year and is up for grabs in 2014, as are a number of other goodies for taxpayers.

The House is expected to vote on Wednesday on a recently introduced bill — slugged, H.R. 5771, "The Tax Increase Prevention Act of 2014," which purports to extend a number of provisions retroactively for 2014.

Nevertheless, tax experts report that they and some of their clients have sat on the sidelines due to the uncertainty of the tax extenders. From a planning point of view, this means clients are holding off on those charitable distributions from IRAs, and those who are small-business owners are putting purchases on hold.

“We were all very hopeful before Thanksgiving, and our hopes were dashed a bit,” said Monica Rebella, an accountant. “If the extenders do pass, that's great — we can take advantage. But at this point we're getting them prepared for taxes to go up if these deductions aren't there for 2014.”


Advisers at Commonwealth Financial Network have been reaching out to in-house tax guru Gavin Morrissey, senior vice president of wealth management, to get a sense of what's going on with strategies that use the charitable distribution from IRAs. With that provision up in the air, the best action is inaction.

“We're saying that nothing has been passed, so we can't advise anyone to do it,” Mr. Morrissey said. The fear is that if clients were to make the distribution without a tax extenders bill, the amount distributed from the IRA could potentially inflate a client's adjusted gross income and phase them out of other tax deductions, he said.

In the event the charitable rollover doesn't survive for the 2014 tax year, clients could still get a charitable deduction for the distribution to the charity, noted J. Christopher Raulston, wealth strategist at Raymond James Financial Inc. At first blush, however, the best thing to do is nothing.

“Tell them the best thing is no action, but if they're adamant and want the benefit if the law is retroactive for 2014, then make the distribution as if the law were in effect,” he added.


Most of Ms. Rebella's clients are dentists, and like many entrepreneurs, they're concerned about a business tax deduction on the purchase of equipment. Section 179 of the Tax Code permits a $25,000 deduction limit on the purchase of equipment for a small business in taxable years after 2013. In previous years — including the 2013 tax year — that deduction limit was as high as $500,000.

Naturally, her clients are hesitant to make purchases over that $25,000 mark, in the event the deduction limit of $500,000 isn't reinstated for the 2014 tax year.

“Clients are trying to decide whether it makes sense to buy the equipment this year and be stuck with the deduction for this year or do it in 2015, where we feel confident that clients will get a boost [in deductions] under Section 179,” Ms. Rebella said. “People aren't pulling the trigger if they've already hit that $25,000.”


Deductions for qualified tuition expenses, as well as mortgage insurance, are also on the table, but for many clients, this is an issue that's non-negotiable. Nobody is going to get rid of their mortgage insurance or pull a child from school just because they won't be able to take the deduction.

As a result, tax experts have been preparing clients for the likelihood of higher taxes in the following year due to the loss of those deductions; better to be mentally prepared to pay Uncle Sam.

“Individuals for the most part go to a CPA for their tax planning, and they'll be told that their taxes may go up because of the loss of these deductions,” Ms. Rebella said. “But people who do their own taxes won't know until they do their returns, and they'll be caught off guard.”


Given the uncertainty of the tax extenders package, accountants suggest looking more closely at an individual's tax scenario and searching for savings opportunities. For instance, now that mutual funds are distributing capital gains, advisers should counter this capital gains tax blow with some losses elsewhere in the portfolio. Also, consider whether it makes sense to defer or accelerate income this year, if the option is available, noted Robert S. Seltzer, a CPA.

“With the extenders, it's mostly either something you have no control over, or it's a big move you wouldn't make unless you know for sure you'll have the law behind you,” he said.


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