Taxable Talk

Acting IRS Commissioner Steven Miller reiterated his warning of a very late opening to tax filing season. In a letter sent to Ranking Member Sander Levin of the House Ways and Means Committee (and sent to Chairman Dave Camp, and Senators Baucus and Hatch), Commissioner Miller noted:

As I stated in my letter dated November 13, 2012, the IRS has maintained the programming of its systems assuming that the AMT [Alternative Minimum Tax] will be patched as it has been in previous years. I also indicated that if an AMT patch is not enacted by the end of this year, the IRS would need to make significant programming changes to conform our systems to reflect the expiration of the patch. In that event, given the magnitude and complexity of the changes needed, I want to reiterate that most taxpayers may not be able to file their 2012 tax returns until late in March of 2013, or even later.

This situation would create two significant problems: lengthy delays of tax refunds and unexpectedly higher taxes for many taxpayers, who will be unaware that they are newly subject to AMT liability. Moreover, if Congress were to act at some point next year to enact a new AMT patch, the time and substantial expense necessary for the IRS to reprogram its systems to reflect expiration of the patch would ultimately be wasted.

In my previous letter, I estimated that more than 60 million taxpayers might be prevented from filing their tax returns while we are reprogramming our computers. This figure includes those who would be subject to additional tax as well as those who would be required to perform the calculation to determine if the changes in thresholds and credit ordering rules affect their tax liability. As we consider the impact of the current policy uncertainty on the upcoming tax filing season, it is becoming apparent that an even larger number of taxpayers — 80 to 100 million of the 150 million total returns expected to be filed — may be unable to file.

This has gotten little publicity in the media, but is likely going to be a huge issue if it comes to pass. We shall see….

Hat Tip: Roth Tax Updates

While the “fiscal cliff” negotiations continue at Washington’s normal pace (i.e. the speed of molasses rolling uphill), there are some certainties. Tax rates are going up next year. In most years, tax professionals advise clients at year-end to speed up deductions and defer income. Not this year!

You may wish to consider locking in capital gains. Let’s assume you own 100 shares of Acme, purchased 10 years ago at $10 per share. Today, Acme is trading at $50 per share, so you have a theoretical profit of $4,000. Assume you sell the shares today and buy 100 shares of Acme tomorrow. You will lock-in your capital gain of $4,000 (less commission) at today’s lower capital gains rates; future profits, though, will be subject to the higher capital gains rates that are coming (and the additional Obamacare taxes on investment income). One worry that doesn’t exist in this situation are the “wash sale” rules; those only apply when you have a loss.

This is not for everyone, though. Reasons why individuals might not want to do this include:

– Planning on selling this many, many years from now;
– Stock will be held and passed on to children (or other descendants), allowing for “step-up” in basis;
– Stock price likely to fall in future months;
– Can’t afford to pay any tax this year; and
– Various other reasons.

Again, this is just a possible strategy you may wish to discuss with your tax professional and stock advisor.