By Linda Stern
WASHINGTON, June 27 A senior Internal Revenue
Service official says she's already concerned about what next
year's tax filing season will look like, because of the mass of
expiring provisions and possible tax changes that could occur
near the end of this year and into next year.
Piling on an additional tax reform bill next year could lead
to "meltdown" that could delay taxpayer refunds, Nina Olson, the
IRS's national taxpayer advocate, told Reuters reporters and
editors during a wide ranging interview this week. She also sent
a semi-annual report to Congress cataloging the same concerns.
At issue is the uncertain nature of many tax provisions. A
so-called "patch" exempting more than 25-million mostly
middle-income families from the alternative minimum tax expired
at the beginning of this year. So did the deduction for state
and local sales taxes and a variety of other provisions. Unless
they are extended by August at the latest, the IRS would have
trouble getting forms out on time for next filing season, she
Of course, it's not all about the forms - it's about the
money. And there's a lot of money at stake for most taxpayers
over the next year. All of those George W. Bush-era tax rate
cuts expire at the end of 2012, as does President Barack Obama's
temporary payroll tax cut and the provision which limits taxes
on most dividends to the capital gains rate.
Republican legislators say they want to extend all the
Bush-era breaks, and most Democrats say they don't want to
extend breaks for taxpayers earning more than $250,000 (or
$500,000 or $1-million, depending on whom you ask) a year. Some
politicos are talking about a scenario in which the AMT gets
patched this year, but all of the Bush tax cuts are allowed to
expire at year's end. That would allow a new Congress (and a new
president?)to come in next year, hand most people a big tax cut,
and give Olson a big headache.
But what about your headache? Mid-year is usually a good
time to lay tax plans for the rest of the year, but this year is
more confusing than most. Here are a few strategies to employ:
- Save more money. Sure, every personal finance article
tends to say that. But there are a few reasons why you may need
more cash going forward. If, as many people expect, that payroll
tax cut expires, your pay up to $110,000 a year will be cut by
an additional 2 percentage points as Social Security taxes go
back to their normal levels. That's roughly $1,000 a year that
the average wage earner won't see in 2012.
In addition, Olson says that too many late changes could
delay refunds. She even floated the fraud-fighting idea of
allowing the IRS to hold everyone's refund until all were ready
at the same time. That's unlikely to happen anytime soon, but if
you're the kind of person that needs your tax refund early to
pay your rent check, you probably should stop counting on that.
- Recalculate your withholding. When tax law changes
mid-year and retroactively, there are always problems with
employer withholding levels. Either your boss is currently
withholding enough money for you to get slammed with the
alternative minimum tax, for example, or he isn't. Find out what
assumptions went into your withholding and look at where your
withholding stands compared to the taxes you paid last year.
If the AMT is not addressed this year, as many as 25 million
taxpayers could owe $3,000 to $5,000 more, says Kathy Pickering,
executive director of The Tax Institute at H&R Block. "Taxpayers
likely to be affected by these changes can and should make
adjustments to their W-4 to have an extra amount withheld
throughout the year to avoid any big surprises at tax time.
- Look over last year's tax return. Which are the deductions
you rely on? If you took the deduction for state sales tax last
year, know that you may not get it this year, and adjust your
withholding or estimated taxes.
If you rely on a lot of writeoffs - home mortgage interest,
charitable deductions and more, know that some of the benefit of
those deductions could fall to rate-lowering tax reform in 2013.
If you've been using the required minimum distribution from your
individual retirement accounts to go directly to charity (and
thus avoid taxation on that distribution), note that that break
also disappeared at the end of 2011. You can wait until the end
of the year to see if Congress extends it, but don't wait so
long you miss your opportunity to write the check and take the
distribution, or you'll face a penalty.
- Watch that space. Anything can happen when election years
and big tax bills overlap, but nothing may happen. Denise Gwyn
Ferguson, a long time tax lobbyist and senior vice president of
federal government affairs at Ameriprise Financial Inc, recently
said that the only certainty is that vacation and travel plans
are likely to get ruined as legislators work up to every recess
and holiday, positioning and voting on tax bills.