The deadline for filing 2011 taxes is one week away, but many Americans should be more concerned with how they are going to pay their 2012 tax bill.
“Give them a week to 10 days to recover, but then it's critical that investors, high-wealth individuals and business owners get in to see their tax advisers early this year,” said Phillip Glasscock, an estate-planning lawyer and certified public accountant.
Many experts believe the tax burdens of wealthy Americans, in particular, will worsen, though no one is sure whether that will be from increased income taxes, capital gains taxes, estate taxes or even through reducing deductions. It won't even matter who gains control of the White House in 2013, according to tax executives.
Investors seem to agree. A majority, about 53%, expect that their 2012 taxes will increase from what they owe for 2011, according to a Spectrem Group survey of 1,336 in-vestors in December. Women, especially, expect an increase, with 57% believing taxes are on the rise, compared with 48% of men, the survey showed.
TAX-DEFERRED SAVINGS
About a third of investors don't plan to take any action to try to trim their tax bills, according to the survey. The most popular step, being planned by 28% of those polled, is to contribute more to defined-contribution plans such as 401(k)s, which are funded with pretax dollars.
Also, about 19% plan to give more to charities. The investor survey also revealed that 30% of millionaires plan to buy tax-free bonds to curb their tax obligations.
Most financial professionals commend these strategies, and some have additional recommendations. But all of them agree that clients should get cracking if they want to trim their 2012 tax bills.
That's because many planning strategies take time to put into place, including some gifting strategies that require appraisals, Mr. Glasscock said. Because the generous $5 million gifting exemption is due to expire this year, appraisers may be backlogged toward the end of the year, he said.
“Put plans in place early this year so clients and professionals have the time they need to take advantage of the tax benefits before the end of the year, which already is one-quarter over,” he said.
Diane Pearson, a financial adviser with Legend Financial Advisors Inc., said the popular step of contributing more to DC plans is especially relevant this year, as the
Internal Revenue Service has increased the 2012 contribution limits for employees to 401(k) and most other qualified retirement plans.
“Individuals who are employees have an advantage and they should be taking it,” she said.
The maximum elective deferral was increased to $17,000 a year, from $16,500, and the combined maximum deferral for employees who receive matching contributions from their employer rose to $50,000, from $49,000.
Small-business owners should consider setting up a DC plan because any contributions they put away on behalf of their employees are considered a business expense, and the owner can put money in for themselves on a pretax basis, Ms. Pearson said.
MAKE IRA CONTRIBUTIONS
She also recommends contributing to an IRA so that money can grow tax-deferred. If you are not covered by another retirement plan, the IRA contribution also is tax-deductible, she added.
Ms. Pearson believes that taxes are destined to rise, given the nation's economic environment. But she doesn't think 2012 is the year the increases will hit taxpayers.
“Taxes will need to increase; I don't see how it can't happen,” she said. “But I'm not sure when.”
Renno Peterson, an estate-planning attorney, said there is no way to forecast a tax increase.
“After all, federal estate taxes have been permanently repealed three times already,” he said.
Tax professionals agree that the nation's tax system needs to be revamped.
Of 180 tax executives polled, 100% said they believe there is a need for fundamental tax reform. However, none of them expect it to occur before the end of 2012, according to a Miller & Chevalier Chartered survey released last month.
About 31% expect that reform will come in 2013 and 33% think it will come in 2014, the survey said.
“Respondents see the pending presidential and congressional elections, coupled with the split in congressional control, as likely putting a significant damper on the tax legislative agenda for the remainder of 2012,” said Marc Gerson, a tax attorney with Miller & Chevalier.
Mr. Glasscock said that not only will tax rates be increasing, but even in areas where they will stay the same, there is a lot more government scrutiny of tax returns and tougher collection enforcement.
Areas with increased scrutiny include Internet sales taxes, where federal and local tax agencies are boosting enforcement of collection from online sales, and rental taxes, where local governments want sales taxes paid when the owners of a business also own the property that is used by the business, Mr. Glasscock said.
Ms. Pearson recommends gifting any assets in 2012 that have a low cost basis, because capital gains taxation rates are set to rise after 2012.
Mr. Peterson said
charitable giving is a good strategy only if clients have a charity they are interested in supporting no matter what.
If someone gives $1 million to charity and gets a $350,000 break on taxes, he or she is still down $650,000, he said.
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