A recent survey found that members of Congress are more
unpopular than head lice. But grant them this: They may have made
it easier to do your taxes, at least in the short run.
See Also: The Most-Overlooked Tax Deductions
The new tax law passed earlier this year ties up a lot of loose
ends that have made it difficult for people to plan for the tax
implications of everything from investing to estate planning to
adopting a child. But come December, taxpayers should be able to
make year-end moves to lower their 2013 tax bills without worrying
that last-minute legislation will upend their strategies.
For the majority of taxpayers, marginal rates will remain the
same. Taxpayers in the 10% and 15% tax brackets will continue to
benefit from a 0% rate on long-term capital gains. Several
child-friendly tax credits, such as the one for adoption-related
expenses (worth up to $12,970 in 2013), were made permanent.
Congress also put a permanent patch on the alternative minimum tax;
it won't help those who already have to pay it, but it will prevent
millions from tumbling into the AMT abyss from now on.
Taxpayers in the top tax bracket will pay higher rates on
income, dividends and long-term capital gains. And new phaseouts of
deductions and personal exemptions will boost marginal rates for
taxpayers with adjusted gross income of $250,000 or more ($300,000
for married couples). But the law also provides relief for
upper-income taxpayers concerned about protecting their estates.
Over the past 12 years, the exemption from federal estate taxes has
fluctuated from as low as $675,000 in 2001 to an unlimited amount
in 2010, when the estate tax temporarily expired. The new law set
the exclusion at $5 million and indexed it to inflation after 2011
(in 2013, the exclusion is $5.25 million). In the future, less than
1% of taxpayers will have to worry about federal estate taxes, says
Richard Behrendt, director of estate planning for Baird's private
wealth management group.
Before you get too complacent about tax planning, it's important
to remember what the law
do. It was primarily a stopgap measure to prevent an
across-the-board tax increase that threatened to nudge the economy
back into recession. It did nothing to resolve profound
disagreements in Congress over government spending cuts, the debt
ceiling, and reforms to Social Security, Medicare and Medicaid.
Nor did the legislation do anything to improve the Byzantine
nature of the tax code. In her annual report to Congress for 2012,
Nina Olson, the IRS taxpayer advocate, declared the code's
complexity the most serious problem facing taxpayers. Businesses
and taxpayers spend about six billion hours a year complying with
filing requirements, Olson said. For upper-income taxpayers, the
new law makes tax preparation even more complex, says Jonathan
Traub, managing principal for Deloitte Tax.
Comprehensive tax reform that would reduce or eliminate
deductions and credits--possibly in exchange for lower tax
rates--offers the promise of deficit reduction and a simpler tax
code. With Congress still deeply divided, though, a broad overhaul
in 2013 is unlikely.