SOURCE: Marks Paneth & Shron LLP

Marks Paneth & Shron LLP

February 06, 2012 10:00 ET

The "Smart Money" Will Approach 2012 as the Year of Contingency Planning

Get Ready to Accelerate Gifting and Realize Income -- and Be Ready to Change Those Plans at a Moment's Notice, as Political Paralysis May Throw Monkey Wrenches, Say Advisors at Marks Paneth & Shron

NEW YORK, NY--(Marketwire - Feb 6, 2012) - For U.S. taxpayers, 2012 may not bring about the legendary apocalypse -- but it will severely challenge both their finances and their flexibility. Approach it as "The Year of Contingency Planning," advise partners at New York accounting firm Marks Paneth & Shron (MP&S).

In a still-struggling economy, federal and state governments are eager to increase revenue. But bitter partisanship and political paralysis at the federal level make it virtually impossible to predict tax policy or know where future tax rates will be set. Any plans made today might have to change tomorrow, and taxpayers must be ready to stay flexible, "turn on a dime" and/or reverse themselves at a moment's notice.

"There is very little precedent for this degree of uncertainty, and tax planning in 2012 will be a major challenge," says Mark Levenfus, CPA, Managing Partner at MP&S.

One Likelihood: Higher Taxes

A few points are clear. The Bush era tax cuts are due to expire on December 31, 2012. If no new policies are enacted, tax rates will reset to much higher Clinton era levels. In addition, political pressure and increased demand for revenue at the federal, state and local levels means that tax rates are likely to rise, particularly on the wealthy. MP&S believes this means that...

  • Individuals -- especially business owners and those with high net worth -- will want to take advantage of lower rates and special provisions before they vanish. They might consider reversing the usual practice and not deferring income, instead realizing it in 2012 to avoid paying higher taxes the following year.

  • In similar fashion, they can consider deferring expenses into 2013 to lower their tax burden.

  • More aggressive gifting might be in order if, as anticipated, the $5 million gift tax exemption is drastically reduced or eliminated.

"We have a sense of where tax policy is likely to go," Harry Moehringer, CPA, Managing Partner says. "The prolonged economic downturn has made both the federal and state governments hungry for revenue. For that reason, and because of the political climate, there is pressure to increase taxes, especially on the wealthiest individuals."

Partisanship Injects Lots of Uncertainty

"But the atmosphere of partisanship in Washington has led to an unprecedented degree of paralysis. No one can predict what new tax provisions, if any, will be enacted. Therefore, while it's possible to anticipate the broad outline of tax policy, any particular plans might have to be reversed with little or no warning. The key is to stay flexible and keep in close contact with a tax professional in order to stay current on developments and take advantage of policy changes as they occur," says Alan J. Dlugash, CPA, a partner in the Tax Practice.

Savvy Taxpayers Will Keep an Eye Out

According to MP&S partners, the "Smart Money" will keep its eye on...

  • The state of the economy. The economy remains fragile, and external shocks such as a possible Euro crisis could derail recovery.

  • The uncertain shape of federal tax policy. If Congress takes no action on taxes, then on December 31, 2012, tax rates will reset to the higher levels that were in place before the cuts. But taxes could move in any direction. (Paralysis is possible if the atmosphere of bitter partisanship continues.) Political pressure could also result in different, but still higher, rates that hit the wealthiest taxpayers particularly hard. Or rates could remain where they are, but action could be taken to close loopholes, as recommended by the Rivlin-Domenici and Simpson-Bowles plans.

  • The doubtful future of the gift tax exemption. There is increased pressure to drastically reduce or eliminate the $5 million gift tax exemption. A reduction to $1 million is possible. If the Democratic Party retains the White House, odds are higher that the exemption will be sharply reduced.

  • The increasing role of state and local tax in tax planning. State governments are facing severe budget shortfalls -- they are revenue-hungry and, like the federal government, they are looking to increase taxes, especially on the wealthy.

"Smart Moves" that the "Smart Money" Should be Ready to Take -- or Abandon -- Depending on How the Policy and Political Winds Blow

  • "Business owners and high net worth individuals will want to think about accelerating their gifting while the $5 million exemption is still in force," says Steven Eliach, JD, LLM, principal in charge of the MP&S Tax Practice. In addition, certain gifting techniques to trusts may not survive tax reform and should be a matter for serious consideration this year. But taxpayers should be careful not to jeopardize their retirement income through wealth transfers. Benefits such as Social Security and Medicare are likely to be reduced, especially for the wealthiest taxpayers, so protecting retirement assets is a priority.

  • Don't rush to refinance properties. With interest rates at historical lows, refinancing has become more difficult than in the recent past. Lenders across the board are reluctant to make new loans and want to hold onto higher rates if at all possible. "Since interest rates are likely to remain low, property owners should plan to refinance but not feel under time pressure to refinance for a while. It might be worth holding out for a higher appraisal, even if it takes a little more time," says Arthur Bloom, CPA, a partner in the MP&S Tax Practice.

  • Resist trying to make up for losses all at once. "Too many investors who suffered losses during the downturn are trying to make up their losses all at once in a single investment, looking to get in on the ground floor of the next big opportunity," says Steven L. Henning, Ph.D., CPA, partner in charge of the MP&S Litigation and Financial Advisory Services Group. "But often the cure is worse than the disease -- these investors, including sophisticated ones, are finding a significant amount of risk and some outright fraud." From MF Global to the rash of allegedly fraudulent Chinese companies listed on U.S. exchanges via reverse mergers, there are traps for those who are pressing too hard to gain lost ground.

  • Talk to a professional about FATCA (Foreign Account Tax Compliance Act): If it isn't keeping you awake at night, it should be. FATCA is effective for the 2011 tax year; it adds a new reporting burden for individuals who hold financial assets abroad, with severe penalties for noncompliance. "To an extent, FATCA duplicates the requirements of FBAR (the Foreign Bank and Financial Account Report), but there are important differences," says James M. Robbins, JD, LLM, a principal at MP&S who specializes in international tax. For example, FATCA requires disclosure of certain hedge fund positions. "Given the complexity of the reporting requirements and the severity of the penalties, taxpayers will be hard-pressed to know their exposure or understand what has to be reported. Getting expert input is essential," Mr. Robbins says.

  • Don't defer income (particularly if you're a high-income taxpayer), especially given the current interest rate environment. "Ordinarily, it's a good idea to defer income into the next calendar year in order to reduce tax liability," says Steven P. Bryde, JD, principal in the Tax Practice at MP&S. "But with the chances high that tax rates will increase in 2013, especially for high net worth individuals and business owners, it might be a good idea to realize income in 2012 in order to reduce tax exposure." This is especially true in a zero or near-zero interest rate environment, where the time value of money is minimal: You may lose still more by holding cash than by paying the tax bill now.

  • Realize capital gains and shedding dividend income before tax rates on both surge.

  • Defer expenses into 2013 to reduce the overall 2013 tax burden.

  • Take a more traditional path if you're a middle-class taxpayer by deferring income and realizing expenses, since middle-class tax rates are more likely to fall than to rise.

  • Make state taxes a major part of your thinking. New York City residents with qualifying capital gains and certain dividend income are paying almost as much in state and local income tax as they are in federal tax on such income. High state and local taxes may push more taxpayers into paying the federal Alternative Minimum Tax, increasing the overall tax burden and negating the advantages of realizing income sooner. "Individual situations are hard to predict, but clearly, state and local taxes have become a critical part of tax planning," says Mr. Bryde.

For more information or to arrange a conversation with a Marks Paneth & Shron advisor, please contact Katarina Wenk-Bodenmiller of Sommerfield Communications at +1 (212) 255-8386 or katarina@sommerfield.com.

About Marks Paneth & Shron LLP

Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of whom approximately 60 are partners and principals. The firm provides businesses with a full range of auditing, accounting, tax, consulting, bankruptcy and restructuring services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services, and energy clients. The firm has a strong track record supporting emerging growth companies, entrepreneurs, business owners and investors as they navigate the business life cycle.

The firm's subsidiary, Tailored Technologies, LLC, provides information technology consulting services. In addition, its membership in Morison International, a leading international association for independent business advisers, financial consulting and accounting firms, facilitates service delivery to clients throughout the United States and around the world. Marks Paneth & Shron LLP, whose origins date back to 1907, is the 30th largest firm in the nation and the 13th largest in the New York area. In addition, readers of the New York Law Journal rank MP&S as one of the area's top forensic accounting firms.

Its headquarters are in Manhattan. Additional offices are in Westchester, Long Island and the Cayman Islands. For more information, please visit www.markspaneth.com.

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