Planning for 2013: Income Tax Considerations to Address Now

Tax benefits can differ from year to year – even when there isn’t an election to consider. For high-income individuals, it’s important to have a multiyear perspective and conduct “what if” scenario planning while working towards  tax and financial planning objectives. Tune into this episode of Deloitte Insights to learn about the benefits of year-round planning.

Speakers

Clint Stretch, Managing Principal, Deloitte Tax LLP
Edward Gershman, Partner, Deloitte Tax LLP

Transcript 

 

It’s time for Insights, a video news production of Deloitte LLP. Now here’s your host, Sean O’Grady.

Sean O’Grady (Sean): Hello and welcome to Insights, where today we will be discussing income tax considerations for 2013. Joining us in New York for the conversation is Clint Stretch, the Managing Principal of Tax Policy within Deloitte Tax LLP. Prior to working for Deloitte, Mr. Stretch served as a Legislation Counsel to the U.S. Congress’ Joint Committee on Taxation and as an attorney-advisor to the Chief Counsel of the Internal Revenue Service. And now joining us remote today from Chicago is Eddie Gershman. Eddie is a partner within Deloitte Tax LLP’s Private Company Services and the leader of the Individual Income Tax Competency. Eddie, I would like to begin with you in Chicago. We are still in the middle of the 2012 tax season and you are here today to talk about 2013, so why do you feel it is important for us to take this long look ahead?

Eddie Gershman (Eddie): Well, Sean, the truth of the matter is there just aren’t any simple, quick, reliable things, any magic bullets that an individual — especially a high-net-worth individual — can rely on and know that they’re going to get the results that they want. Even in the most straightforward of legislative environments — and we are far from a straightforward legislative environment currently — when you enter into a transaction, you can get some type of an odd result. So, for example, you might contemplate a large or a significant charitable contribution. If you look at making that contribution this year or next year, for all sorts of odd reasons, you are potentially going to get a very different tax benefit one year versus the other. The same could be said for the sale of a business or a significant capital gain event.

If you look at realizing a transaction in one year versus another year, you’re likely to get a different tax result for any number of reasons. So, that tells me  a couple of things. One, it’s important to look at your tax planning with a multiyear perspective in order to position yourself to conduct some “what-if” scenario planning, like what if I have this transaction this year and what would the results be if I defer it to another year. It helps you quantify the possible results from these scenarios. The other thing it tells me is the importance of looking at your tax planning on a long-term basis and being committed to looking at it on a long-term basis, really marrying together that with the idea of doing some multiyear planning. And then finally, in terms of the timing for doing your tax planning, you’ve probably heard of the term, “year-end planning” and I guess if it is the end of the year and you haven’t done your planning yet, then it’s okay to start your planning at the end of the year. But I like the term, “year-round planning” more. There is no time like the present. You want to start looking at things today. Obviously, you’re not going to do your tax planning on a daily basis, but if you look at things today, then you will reevaluate them throughout the course of the year. You’re going to be best positioned to realize the tax and financial planning objectives that you’re hoping to realize.

Sean: Thank you for that, Eddie. I am going to pose the same question to you, Clint, because it’s almost like we’re talking about “year-ahead planning.” What is it about an election year, about 2013, that you think folks need to be taking into consideration right now in doing their tax planning?
Clint Stretch (Clint): I think the real challenge is, we have an excruciating amount of uncertainty in the system. The estate taxes are going to go away or they’re going to go up. It depends on which political party you listen to. We’re going to have higher rates or we’re going to have lower rates, depending on who you listen to. But if nothing happens, we have a radically different tax system in 2013 and then a promise of tax reform after that. So, the task for an individual is to figure out what is their own personal view of the future. They have to do the hard work of having a prediction so they can do that year-round and multiyear tax planning in as informed manner as possible, while keeping an eye on Washington because things may change — things will change.

Sean: Well, let’s walk through that a little bit because you mentioned that there are really three potential paths — things stay the same, things go up, things go down — to make it really simple. How would an individual go about preparing for those three options all at once?

Clint: I think the first thing is to understand what the options are and then to back up and look at overarching political reality — where are you and what do you think is going to happen? So, the options are for the Bush tax cuts to go away, to return to the kind of tax rates that we had in the Clinton era — the top rate is at 39.6% for ordinary income, 20% for capital gains income, plus the new health insurance tax that would push it up another 3.8%. So, that’s one end of the spectrum. At the other end of the spectrum are proposals from conservatives that would eliminate tax on investment income, that would lower taxes, and lower rates as they lower taxes. Then in the middle is the idea of some kind of broad-based reform. Lower the rate but bring in tax in other ways, so you still have the revenue that the government requires.

So, when you know those are the options, the next question is, do I think taxes can go down? And I think a lot of people will look at it and say that is hard thing to accomplish because we have the cost of Medicare going up dramatically, the cost of Social Security going up dramatically. If you start cutting taxes, then you’re going to have to cut even more benefits than already required by the dynamics of the economy. And so most people, I think, would conclude that — like it or not — taxes probably aren’t going down. Then the question is, well are they going up, and if so, how? Are they going to up as higher rates? Are they going to go up by taking away deductions and credits and things like that? That’s a hard thing to puzzle out.
When I look at it, I think the answers are clearly nothing is happening this year. In 2013, the most likely thing is we have the law that we have now because if we can’t fix it before the election, the temptation after the election to just kick the problem into 2013 and do a tax reform will be pretty big.

Sean: Thank you for that, Clint. Eddie, I want to take that question over to you as well. What are you advising your clients? How are you preparing them?

Eddie: Well, it’s interesting because, with all the complexity out there, it really is difficult for people to think through this. So, what we are focused on is that people need to recognize that you just don’t have the luxury of deferring your tax planning while Congress is sorting out exactly what it is that the legislative landscape is going to look like. So, a decision to do nothing — and it is tempting to do nothing in the face of all that uncertainty — a decision to do nothing is still a decision and it’s probably not the right decision for our clients. So, what we’re really focused on in terms of our conversations with them is planning, planning, and more planning.

Clint outlined these multiple outcomes for consideration — and not just the outcome but the timing of the outcome. So, what we are trying to do and encouraging people to do is to plan within each of those potential outcomes, and to form an opinion as to which they think may be most likely; but to have a plan for each of them because if you don’t do the heavy lifting now, what very likely may occur is that the end of year may very well be when you’re first getting a glimpse what 2013 will really be like, and if you can go ahead and do the heavy lifting today and work your way through these multiple potential outcomes, you’re positioned to actually do something quickly. You’re ready and you’re prepared to do something quickly if you need to, and that’s really what we’re trying to help our people do — to think through the multiple outcomes we might see and to have a plan within each of them.

Clint: If I might add to that, I think it’s absolutely right that not doing anything is making a decision, and a lot of what goes into personal wealth planning is figuring out how to make money because if you don’t make money, you’re not going to have it. So, that is step one and tax is the thing you do after you make money. What we’ve seen in the past tax reforms is they take a long time. They don’t happen all at once. So, we don’t have a presidential proposal, we don’t have a Congressional proposal from the leadership that is comprehensive and can give you the road map. We have some uncertainties. It is not unusual in those circumstances that the law putters along, essentially unchanged for a while, and then you begin to see the direction that is going to emerge. We’ll begin to see that after the election, but it’s not going to happen all at once. So, to plan on the basis of the present law and then introduce a range of uncertainty around it — that seems to be the right angle. But to do nothing may have you left in the wrong investments, left with the wrong strategies, from the topline point of view, and if the topline is wrong, the bottom line is not going to be right.

Sean: We’ve been talking a little bit about the preparations. We got a little into the horse betting where we think this might go, so my last question for both of you, and we can just begin here with you Clint, and that is what kind of cues are you looking for? Is it something from the government? Is it something from the economy at large? What is your finger? What pulses are you on here?

Clint: One of the things I’ve concluded watching the debt limit debate, the super committee debate, the payroll tax debate is — Washington is not going to solve this problem by itself. It doesn’t know how to do it. If the politicians could solve this, it would be solved. And so what I am watching is, what’s happening in the body of politics, how is Main Street reacting, how is Wall Street reacting, what is happening in debt markets, and I think we will begin to see some clues out of the private sector that show us when they are losing patience with the amount of gridlock. And then things will start to move forward. So, I am watching that and that is very hard to watch.

The other thing I am watching is the political world in terms of who is up and who is down. When we get results from the election, that will tell us a lot of things. It will tell us who controls the Senate, who controls the House, who is in the White House, and what the potential for compromise is. You know one of the things that happens with elections is the ability of people within the Congress to compromise shifts depending on the makeup of the political parties and whether they’re more centrist or more out on their wings, so that’s what I’m watching.

Sean: So, macro-level view on both sides. Eddie, your thoughts and what are the cues you are looking for?

Eddie: Well, I would add to that just a couple of things. One is instead of cues, I would like to see people working with advisors who can help keep them apprised of what is going on legislatively because there are things occurring on a regular, if not a daily, basis and being apprised of the ongoings in Congress is an important part of this. And beyond just being apprised of it, by working with a trusted advisor they may even be able to help you shape your own views on what potential outcomes you perceive might occur. As Clint mentioned, the election in November is going to be a big happening and something that we are clued into as well. And then finally, what I would come back to this whole idea that people have been dealing with this sense of gridlock for quite some time and a high-net-worth individual has been making decisions within that framework— decisions with respect to the investment choices they’re making or transactions they might be considering or whether it’s their gift or estate planning or even their risk profile — and those decisions have been affected by the gridlock they’ve been facing. And what I’m really looking forward to is, as the gridlock eases and as we sort of get a sense of where things are going to go legislatively, it’s really going to be important for everybody to go back and reevaluate the decisions in each of those categories even more. Because whatever the outcome is going to be of all the different potential outcomes, once we know it, there are lots of opportunities that are going to need to be unearthed and discussed with your advisor.

Sean: So basically keep your eyes open and make sure your intel is good. Gentlemen, thank you both for joining us. Alright, we have been discussing tax considerations for 2013 with Clint Stretch and Eddie Gershman, both of Deloitte Tax LLP. If you would like to learn more about Clint, Eddie, or any of the topics discussed on today’s broadcast, you can find that information on our website. It is http://www.deloitte.com/insightsus.

For all the good folks here at Insights, I am Sean O’Grady. We will you see next time.

 

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