What’s Next After “Super Committee” Stale Mate?₁

On November 21, the Co-Chairs of the Joint Select Committee on Deficit Reduction released a statement that said, in part, “After months of work and deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.” This concludes a period of debate among committee members on how to address the nation’s budget deficit crisis. Though there were several hints of a possible bipartisan proposal, the primary area of contention – negotiations around entitlement reform on one hand and claims for increased tax revenues on the other – proved to be insurmountable for the committee.

With respect to the overall tax landscape, where does this leave us for the rest of 2011 and through 2012?

There are a number of significant tax-related provisions, which are due to expire at the end of 2011. Reports indicate that several of these were being addressed as part of the super committee negotiations. Key items due to expire include:

• Employee payroll taxes – currently at 4.2% of wages for 2011, scheduled to revert back to 6.2% in 2012
• Certain unemployment benefits
• The Alternative Minimum Tax (AMT) exemption amount, which is scheduled to revert back to levels in place a decade ago, would result in an additional 25 million taxpayers being subject to the tax in 2012
• 100% expensing for businesses
• Medicare payments to doctors and other health-care providers – current law calls for these payments to be reduced by roughly 30% if no legislative action occurs
• Tax-free IRA distributions to qualified charities

The super committee’s failure to reach an agreement on $1.2 Trillion in deficit reduction triggers automatic spending cuts of that same amount to occur beginning in 2013. These cuts largely exempt social programs such as Social Security, food stamps, and Medicaid. There are slight spending cuts within Medicare totaling 2%, derived from reduced payments to providers. The bulk of the spending cuts will affect discretionary, non-defense, and defense budgets roughly equally. There are already discussions among leaders in Washington to reduce or prevent these spending cuts before they occur.

It is likely that no major tax-related changes involving the fate of the Bush tax cuts or the potential for comprehensive tax reform will occur before the elections. The debate around the Bush tax cuts, entitlement reform and other tax-related issues such as the fate of popular tax deductions will be central to each party’s platform as November elections approach.

In reality, this recent super committee ‘deadline’ was more of a political positioning ploy than anything else. The budget being discussed is for the fiscal year 2013, so the real deadline is the fall of 2012. Expect much more debate and rhetoric leading up to this time. It is certainly something we will be watching out for in the coming year but don’t anticipate it being finalized anytime soon.

Year End Tax Planning Strategies

One area that is crucial when planning for future financial goals is to analyze the tax impact one’s investment have. As we near the end of 2011, there is still time to take advantage of tax savvy investments that can help lower your tax burden both now and in future years.  These tax planning opportunities are available whether you want to save for your future retirement goals or save for kids/grandkids future college expenses.

Here are some year-end tax planning strategies focused on reaching future retirement planning goals:

1. Fund a Roth IRA - individuals can invest up to $5,000 per year into a Roth IRA and those ages 50 or over can invest an additional $1,000 ‘catch-up’ contribution. Funding a Roth IRA does not provide a tax deduction in the year of contribution, however, it allows investment earnings to grow tax-deferred and withdrawals (if taken properly) come out tax free.
2. Fund a Traditional IRA – individuals can invest up to $5,000 per year into a Traditional IRA and those ages 50 or over can invest an additional $1,000 ‘catch-up’ contribution. Funding a Traditional IRA provides an income tax deduction in the year of the contribution and earnings grow tax-deferred each year. Withdrawals are taxed as ordinary income in the year taken.
3. Contribute to your 401k – contributions can still be made for 2011 until December 31^st. If your company matches employee contributions, then at a minimum, take advantage of that opportunity.  The tax advantages of 401k plans are similar to a Traditional IRA in that contributions provide an income tax deduction, earnings grow tax deferred and withdrawals are taxed as ordinary income in the year taken.

The IRS allows individuals to fund Roth IRAs and Traditional IRAs for 2011 up until April 15^th 2012 (tax deadline), so this provides even further time to take advantage of this planning strategy while still reaping the potential tax benefits on your 2011 tax return.

As Indiana residents, the state of Indiana provides a very nice tax incentive to save for a child/grandchild’s college education through the 529 College Savings Plan. Contributions into this plan qualify for a 20% state tax credit, up to $1,000! For example, if one were to put $5,000 into the state of Indiana’s 529 plan before December 31^st, then they would receive a $1,000 state tax credit when they filed their 2011 tax return (i.e., a 20% credit)! Money in this account can be used to pay for secondary education expenses at any accredited college in the country, not just colleges in Indiana. These college savings plans not only provide a benefit in the year of contribution but earnings also grow tax-deferred and withdrawals (if used for qualified secondary education costs) also come out as tax-free income!

There is still time to be proactive and take advantage of one of these planning strategies to help minimize the tax burden when it comes time to complete your 2011 tax return. If you are wondering if it makes sense for you to take advantage of any of these year-end tax planning strategies, please give our office a call to discuss further.

3rd Quarter Survey Winner

Congratulations to our third quarter survey winner, Fred and Tracie Moritz! They won the drawing from the returned surveys and are winners of a $25 restaurant gift card.

Thank you to all who have given your feedback and completed/returned the surveys back to us this year. We greatly appreciate your input and are always looking for ways to provide you the best service possible.

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Disclaimer: © 2011 WealthCare Partners – Securities are offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. WealthCare Partners and Cadaret, Grant & Co., Inc. are separate entities. WealthCare representatives are licensed in the States of Indiana, Florida, North Carolina, South Carolina, Texas, Washington, California, Oregon, Michigan, Illinois, Ohio, Mississippi, and New York.

1 source: Putnam Investment commentary from Putnam.com