Tax Overhaul Likely Coming Soon

Now that the election is behind us, hopefully Congress and the White House will get together and reform what has become an ever expanding and complicated Internal Revenue Code.

We have been using “band-aid” tax law now for several years and the general public deserves to be able to plan according to one set of rules that will not be changing quite so often.  This should be good for the economy because the uncertainty of what we have been experiencing is hampering economic growth and hence tax revenues.

The last major tax overhaul occurred during President Reagan’s second term in 1986.  He hinted at changes before his re-election, but went after it aggressively after he secured re-election.  The tax code was significantly “scrubbed clean”.  It was accomplished only with a significantly bi-partisan push by The President and Congress.  We hope that both sides of the aisle understand that this is the only way to accomplish great change.

One example of the “band-aid” approach to the current tax law is how Congress deals annually with the “Alternative Minimum Tax” patch.  Let me explain:  There is a deduction allowed in calculating the AMT that is based on an amount in the tax code from the late 80’s.  That amount is not “indexed” to inflation.  Every year, Congress is required to pass law (usually in a bill including several other tax law changes) to pass the AMT patch and change the deduction for inflation.  As of today, the AMT patch is not in place for 2012 but likely will be there by early 2013.  So, in planning taxes for our clients for 2012 are we to assume that the AMT patch will occur or not?  If the AMT patch does not occur, over 20 million taxpayers in the US will owe additional taxes.   If it occurs too late, several people will be required to file amended tax returns for the retroactive changes to the tax code.  How inefficient is this process?

Whatever the tax overhaul looks like, it will certainly be better than what we currently have.

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