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Whatever November Brings, Start Preparing Clients Now

2013 tax uncertaintyThere will be some significant potential consequences on the horizon if Congress allows certain existing tax laws to expire on January 1, 2013. With only a few months left to plan, it’s time for CPAs to be aggressive in educating clients about the decisions they may face.

Several tax changes are now set to occur at the beginning of 2013 if Congress does not act. Among them:

  • Individual income tax rates will go up.
  • Long-term capital gains rates will rise.
  • The gift and estate tax exemption will drop from $5.12 million to $1 million. Estate assets more than the $1 million exemption will be taxed at a maximum 55% rate.
  • Taxpayers whose income exceeds a set “threshold amount” will be subject to a 3.8% Medicare surtax on net investment income, effectively raising their marginal income tax rate. An affected taxpayer in the 39.6% bracket—the highest bracket in 2013—will have a 43.4% marginal rate. This will apply to individuals and trusts and estates.
CPAs can provide value to clients by helping them prepare to move in different directions depending on developments. Some clues should be available by November, when we will know whether we have a president and congressional majorities of the same party or if the White House and one or more branches of Congress represent different parties. In the latter case, we can probably expect more deadlock and little hope of quick action.

In either case, though, we really don’t have the luxury of waiting until November, because doing so would leave clients little time to understand what’s at stake and make prudent decisions. CPAs must start informing clients about their options now.  That’s particularly true of one change with serious potential costs: the steep drop in the gift and estate tax exemption, something that could inspire substantial revisions to planning approaches to avoid significant losses of wealth. Shifting income or gifting assets to younger family members is one simple way to avoid higher future estate taxes. Even though the approach itself may seem relatively straightforward, however, clients can’t be rushed into making decisions about multimillion dollar gifts. Their planning will naturally need to involve conversations between spouses and with attorneys or other advisers. It may include some tough decisions about how to apportion gifts among family members or how to use a trust to encourage or discourage certain decisions or behaviors. Clients should not be forced to take on this kind of planning at the last minute, which is why it’s prudent to get them started on the process now. CPAs can begin the discussion with clients by offering them a decision tree that illustrates possible events and their choices in each case. From there, practitioners can work with their clients to determine the best steps for them.

Given that it’s an election year—and in light of the polarization in Congress—it’s fair to assume that we will not see substantial new tax laws passed by year-end. With that in mind, CPAs should act now to ensure clients have the time to make the right decisions. This post has only touched on a few of the areas to consider, but CPAs can turn to a host of AICPA resources for help. They include Preparing Your Client for the 2013 Tax Increases: Tools, Tips and Tactics, a multifaceted toolkit that explains the issues and features quick reference charts, a PowerPoint presentation to educate clients, a video and a downloadable book. It’s a good starting point for providing clients with the advice they’ll need to make some important decisions. 

Robert S. Keebler, CPA, MST, DEP, Partner, Keebler & Associates, LLP. Bob is a 2007 recipient of the prestigious Distinguished Estate Planners award from the National Association of Estate Planning counsels. From 2003 to 2006, Bob was named by CPA Magazine as one of the top 100 most influential practitioners in the United States. He is the past Editor-in-Chief of CCH's magazine, Journal of Retirement Planning and a member of CCH's Financial and Estate Planning Advisory Board. His practice includes family wealth transfer and preservation planning, charitable giving, retirement distribution planning, and estate administration.  


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