Taxed By Confusion


CPAs and financial advisers have these three words of wisdom for taxpayers this year: Duck and cover.

Seldom if ever has U.S. tax policy, present and future, seemed more confusing and burdensome to the average taxpayer – and the exceptional taxpayer, as well.

“It is complicated this year, more than ever, to say the least,” says Doris Martinez, president of Lakewood-based Taxpayer Defense, a firm that specializes in aiding taxpayers through audits and the like. “Things are hard; things are terribly difficult right now.”

This is an especially poignant moment for taxpayers for two main reasons: First, no one can predict what Congress and President Obama will do regarding taxes, even for health care, the most imminent tax package, although everybody agrees taxes are going up; second, the “Bush tax cuts” are due to expire at the end of the year, and no one knows what’s going to happen with them either, other than to say that their end means taxes are going up.

“No one knows what is going to happen next year, so the only thing that seems almost certain from my perspective is that Congress and the president are going to let the Bush tax cuts expire,” says Wayne Farlow, founder of Westminster-based Financial Abundance LLC and a ColoradoBiz columnist. “The implications of that are that my wealthier clients, my clients in higher tax brackets, their tax brackets automatically are going to go up, and long-term capital gains taxes and dividends taxes are going to go up.”

“We have had numerous tax changes with the various stimulus acts and other things, so what we mainly look for is not anything in particular but the overall increase in taxes. Something is going to happen, but we don’t know what. There are so many things in flux,” says Chuck Bryson, managing member of Greenwood Village-based Bryson Engelstad & Co. P.C.

Martinez has been in private practice since 1986, and prior to that was an IRS field agent for seven years. She points out that not only is tax policy uncertain and tax law barely comprehensible, but the administration of the IRS itself has entered a period of extreme storm and stress.

“We are finding that even the simplest cases, things that used to be simple, have become extremely difficult,” Martinez says. “For example, it used to be much simpler to get payment plans for relatively low dollar amounts. Now they are taking sometimes over a year to get resolved, just to settle on a payment plan.”

Despite the uncertainty, there are ways the upper-middle class and middle-class as well as the upper class and upper-upper class can prepare for 2010 and, worse yet, 2011.
One thing to do is sock some money away to pay higher taxes come 2011.

“Plan to have some money to pay in the future. What we have had our clients do is report whatever income they could now and not defer income because if they do that, chances are they will pay more taxes,” Bryson says.

One facetious bit of advice from estate planners is, if you have a large estate, please drop dead soon.

That’s because, along with the rest of the Bush-era tax cuts, the elimination of inheritance taxes that administration phased in beginning with the Economic Growth and Tax Relief Reconciliation Act of 2001 is itself due to be eliminated at the end of the year.

Some believe the inheritance tax rates will revert to 35 percent; some say 50 percent is more likely. Many say there’s no point in handicapping that race because no one, not even Congress, knows.

“As a general rule we are advising clients that taxes probably will go up. As for estate taxes, right now nothing has changed, so estate taxes are gone for 2010, but there is still the potential that the tax law will pass and be made retroactive to the beginning of this tax year,” Bryson says.

“Right now I have a client who has a mom who passed away Jan. 1, 2010. The law states that there is no estate tax at all. So for now that is what we are planning, no estate tax. But something could happen. But we don’t know.”

Then there’s another huge category of uncertainty, namely questions regarding the eventual shape of proposed legislation such as health-care reform and cap and trade.

As far as health-care reform, “God knows where that will come out,” says Stephen (Pete) Peterson, president of Grand Junction-based Maxfield Peterson PC tax preparers. “There is a little certainty with that, but until the House and Senate reconcile their versions of the law, we are kind of in a holding pattern. We’ve seen so many proposals regarding who is going to pay for health insurance: wealthy individuals, the health insurance companies? These things come at a pretty high price, and they need to be paid for, so there’s a lot of uncertainty there.”

Tax preparers agree that taxpayers could coast through 2010, albeit at their peril.

How do you make sense of what’s going on in Washington for your clients? We asked Richard Cote of the Aspen-based Otte & Cote CPA.

“Well, you don’t. The thing that we have been hearing is that in 2010 there probably are not going to be any major changes: Things will be extended and stay the way they were in 2009 for the most part, and then in 2011 expect some major changes. More than likely taxes are going to increase, so we try to encourage clients to accelerate income into the current year.”

One potential way to do that is to convert your present IRA into a Roth IRA, thus paying the applicable income tax in advance while taxes are lower, rather than paying later on, when taxes will likely be higher. But that is a highly individual strategy that requires the expert attention of CPA or other high-level tax preparer, the experts caution.

“At the end of the day a lot of people including myself are going to be looking under every stone and rock this year to see how aggressive we can get to put some good tax strategies into play, knowing that in 2011 the latecomers are really going to be scrambling,” Cote says. “The only thing that is certain is that now is damn good time to die if you have a big estate.”

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