Tax advisers, including our tax attorneys and accountants at Kingman Winslow, LLC, are already making special plans ahead of filing season next year, when they expect big problems if Congress doesn’t confront major tax provisions set to expire at the end of 2012.

For example, Income-tax rates, investment taxes, some itemized deductions, estate and gift taxes, payroll taxes and the alternative minimum tax (AMT) are all unclear as how they will be applied in 2013.   This is because, after year end 2012, key tax rates are to “sunset” and go back to what they were before a series of cuts launched by President George W. Bush in 2001 and 2003.

These cuts, known as the “Bush Tax Cuts” were originally set to expire in 2010.  As a result of action by Congress at the end of 2010 they were extended for two more years, and therefore now set to expire at the end of 2012.  As a result, when these tax cut rates expire at the end of 2012, both salary and investment income will rise, especially for those who earn the lowest income.   Additionally, the estate tax unified credit amount will drop from an exemption of $5.12 million dollar exemption, per person upon death, to an exemption of only $1 million per individual.  Dividend income will also climb, after having been treated like capital gains with a tax rate that shrank to 15%. The top rate on capital gains is set to go to 20%.

Therefore, If Congress fails to “fix” these problems by enacting further extensions to these provisions, the IRS, tax software firms and tax preparation firms will all be scrambling to play catch-up meaning many tax preparers will be forced to file later than usual for their clients.

Estimated tax payments, for existing clients, are already difficult issues for tax preparers, and financial advisors are concerned about how to keep clients liquid enough to make college payments and pay down other debt.   Moreover, all clients would be well advised to review their current estate plans and do planning before the expiration of the current Unified Credit Exemptions, which currently allow for up to $5.12 million per individual (see paragraph 2 above).

Earlier this month, IRS Commissioner Doug Shulman warned of serious trouble next April.

If Congress can’t act by the end of the year and “even start to think about retroactive legislation of things, like the AMT, which have already expired, you could have a real disaster in the filing season where there’s total confusion, where some people are filing under one law and…under another,” Shulman told reporters.

All tax preparers want to know whether Congress will decide to keep some cuts in place, by extending some or all of the “Bush Tax Cuts” again or whether some of these tax cuts will be replaced by other tax laws, or just allowed to expire and revert back to pre-Bush Tax Cut rates.  Another big question, is what will Congress do about the Alternative Minimum Tax (AMT), which for the past several years has been given an annual legislative fix to keep it from applying to many more taxpayers.

What should well advised clients do about the uncertainty facing the tax outcomes for the 2012 tax year?   If a client knows that they are already scheduled to have a large refund for next year the clients would be well advised to file early to get their refunds and then amend their returns if the IRS changes significant or other impacting changes tax place at a later date.  However, the vast majority of clients would be better advised to wait until Congress and the IRS allow the provisions to “sunset” or replace them with different laws in the interim.

All well advised clients should understand that impending changes in the tax code have raised questions about how to handle estate planning advising, dividends, foreign income, and REITs, among other investments, and the whole picture is very uncertain and growing in complexity daily.   As a result, clients should be advised early and often that their taxes will likely be filed late for the 2012 tax year.