Capitol building

After the election, Congress needs to address various unfinished tax matters, like the AMT exemption, during its November-December lame duck session.

Tax strategies

Congress’ Lame Duck Session and Unfinished Tax Business

  • Brian Humes
  • 11/2/2012

With the election soon to be behind us, we know that Congress will be back in a November-December lame duck session. There is important unfinished tax business that needs attention.

“The uncertainty of the 2013 income tax rates, the so-called ‘tax cliff,’ has received all of the press,” says Jill Kling, Southeast regional private client tax leader with CliftonLarsonAllen. “But Congress will first need to deal with the unfinished 2012 tax matters, such as updating the AMT exemption and other extenders.”

2012 extenders

Congress routinely needs to renew expiring provisions in the tax law, and about 30 of those items remain to be addressed for the 2012 tax year. The most notable, and the most certain to be enacted, is an update of the alternative minimum tax (AMT) exemption.

“Without an update, nearly every taxpayer would find AMT as the prevailing system, exposing most to a substantial tax increase,” notes Brian Humes, the Western Midwest regional private client tax leader with CliftonLarsonAllen. For this reason, it’s a virtual certainty that the AMT exemption will be cleaned up before the end of the year.

“And there is more,” notes Humes. “Many other popular provisions have not yet been extended, such as the sales tax deduction for states without an income tax, the personal tax credits that offset both regular tax and AMT, and the research tax credit for businesses.”

Some of the less popular provisions may not get extended due to budget considerations. It is likely that the AMT exemption update — as well as most other tax credits and deductions — will be extended, as they have in the past.

Expiring economic recovery provisions

Several of the expiring tax provisions are not classic “extenders” that Congress has repeatedly renewed. Rather, they were enacted as temporary economic stimulus provisions to help an ailing economy after the recession hit in 2008. Businesses that purchase new equipment have been able to write off a percentage of the cost in the first year; formerly this was 100 percent, and for 2012 it is 50 percent. Individuals have enjoyed two years of a 2 percent cut in the social security rate, applicable to both wage earners and the self-employed.

These incentives expire at the end of 2012, and the consensus seems to be that Congress will not renew these, both for budgetary reasons and because these incentives were intended to be short-lived.

2013 tax rates

The so-called “tax cliff” (or “fiscal cliff”) has been well publicized. Without any action by Congress, in 2013 we revert to 2001-era income tax rates and credits. Total inaction on the part of Congress and the administration is very unlikely, given that an “over the cliff” reversion would be costly to virtually every income tax filer.

The economy is still fragile, and there will be a need for political compromise. Neither party is likely to gain total control of the White House, the House of Representatives, and the Senate in a filibuster-proof manner that allows a one-sided approach. Accordingly, compromise holds the greatest promise. That should happen in the upcoming lame duck session with action in December, but it could be deferred to the new Congress in early 2013.

“If Congress doesn’t deal with this, the income tax rates go up for every filer, from the lowest to the top end,” notes Kling. “There may be some tinkering at the upper brackets, but in an economy that is still coming out of a recession, the massive income tax increases that would occur if the 2012 income tax rate system is not extended seem unlikely.”

The estate and gift system may be more susceptible to adjustment. The present estate and gift exemption for 2012 is slightly over $5 million per person, with a 35 percent rate on the excess. Without Congressional action, we will revert to a smaller exemption and a higher rate.

“It is highly unlikely that we will fall ‘off the cliff’ to the old $1 million exemption and a 55 percent top rate,” says Humes. “If we are going to revert here, the worst case is probably the $3.5 million exemption that applied in 2009 with a top rate of 45 percent.”

The final outcome is most likely closer to the present system.

Compromise likely

We will provide an update — and insights on how to deal with the changes — when Congress resolves these matters.

In the interim, remember that Congress will most likely reach a compromise that essentially preserves the present tax system, especially after the political heat is turned down after the election. The election will not change the makeup of those who will deal with these matters in the lame duck session.

However, there are some higher tax rates coming in 2013, in the form of the 3.8 percent net investment income tax and the 0.9 percent Medicare tax on earned income. Individuals who can recognize gains and earned income in 2012 instead of 2013 will be able to avoid those new taxes.

How we can help

Consult with your CliftonLarsonAllen tax advisor if you have income decisions or other major transactions that could fall into either 2012 or 2013. We can assist in determining how to best plan those decisions in light of this tax rate uncertainty.

  • Brian Humes
  • Principal