Updated Thursday, July 24, 2014 as of 8:08 AM ET
Portfolio - Investment Insights
Plan Alternative Scenarios for Next Year’s Tax Rates
by: Michael Cohn
Friday, November 9, 2012
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It may be some time before Congress and the Obama administration decide what to do about the tax rates for next year, so it’s a good idea to plan for various alternative scenarios just in case.

Greg Rosica, a tax partner in Ernst & Young’s Personal Tax Services who leads the firm’s Southeast Area Private Client Services practice, and a contributing author to the Ernst & Young Tax Guide 2013, advises accountants to sit down with their clients and do some what-if planning.

“As we enter these last two months of the year and look at what people should do with the current situation that we have, we know what our tax rates are today, and we know that on January 1, they’re scheduled to go up significantly, back to where they were at the beginning of 2001 and 2003,” he said. “In addition to that, we have the Medicare add-on that’s coming. That’s what we know today. What people should really do is sit down and come up with some alternative planning scenarios for their situation.”

In one scenario, he recommends that clients look at their situation if the change in tax rates planned under current law occurs, and what they should do. In areas where they have some control, it might make sense to accelerate their income or defer deductions.

If they’re self employed, for example, they have some control over the timing of when they’re taking in revenues, billing and collecting from customers, selling certain assets, and paying expenses at either the end of this year or the beginning of next year.

If they’re wage earners, they may have itemized deductions over which they can control the timing, such as charitable contributions and real estate tax payments. “There are a lot of things that are within the control of the taxpayer to be able to accelerate or defer income and/or deductions,” said Rosica. “For someone who might be an executive at a public company, they certainly might have things like restricted stock or stock options or nonqualified deferred comp plans, many of which have tax triggers that are controlled by the individual taxpayer, so they can look at those situations to see whether it makes sense to trigger some of those this year, or wait till next year.”

They should also build a different scenario in which potential tax changes occur before next year. In some cases, they might need to wait as long as they can, perhaps until the last week of December, to take action. In other cases, if they’re dealing with stock options, for example, there might be windows in which they have to pull the trigger earlier.

“Look at what the situation is,” Rosica advises. “It’s certainly possible there may be a deferral of this expiration, if Congress and the President get together and they decide that they’re going to do some kind of deferral to give time to come up with some kind of tax reform.”

Rosica noted that Obama mentioned tax reform in his acceptance speech on Tuesday night as one of the items that he needs to get done (see Obama Wins Re-election, Pledging to Reform Tax Code). “There are certainly indications that there will be something coming and changing, so we need to build some plans to take into account, if we hear something before the end of the year, what course of action we would take,” he said. “And if we don’t, then based on what we’re feeling and seeing at that point in time, whether we should pull the trigger on some of these items based on what happens in 2013 or not.”

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