Taxes and Transitions: Navigating a Sea Change of Legislative Reform (BNY Mellon)

KEYWORDS: tax, American Taxpayer Relief Act of 2012, Medicare, tax reform


Joan K. Crain, CFP, CTFA, TEP; Jeremiah W. Doyle, IV, Esq.

  • BNY Mellon


IN 2013, THE U.S. TAX LANDSCAPE BEGAN A TRANSFORMATION of historic proportion, with the first major tax increase for higher-income earners in more than 20 years. Controversial and sweeping tax changes have been finalized into law, with dramatic implications. The new legislation will shake up the worlds of investing, retirement and estate planning for years to come.

Taxpayers, weary from the Byzantine maneuvering of politicians, are struggling to understand the American Taxpayer Relief Act of 2012 (AT RA) and its impact. It doesn’t help that the legislation is fraught with complexity, leaving many taxpayers uncertain about what they will face in the coming years. At the same time, more comprehensive tax reform is still on the table in Washington.

In addition, the 2010 healthcare legislation has aimed a number of tax-related thunderbolts squarely at high-income earners. Some, like the Medicare payroll tax increase, are overt. Others, like the new Medicare surtax on net investment income, are stealth. Consequently, higher-income taxpayers may have no idea how deep their new tax bite really is.

While many tax changes are being implemented, more are yet to come. The legislative horizon is already dotted with contentious suggestions, such as the possible elimination of the mortgage deduction. Even without a crystal ball, it is safe to predict that U.S. tax reform leaders will leave the door open for future disruptions. Not to mention that the automatic spending cuts known as the sequester, if implemented, would put painful budget reductions on the table every year through 2021.

Putting it simply, we are in an era of taxes and transitions. Investors need to pay careful, continual attention to the details of what has changed and what is apt to change. This is particularly true of those going through their own transitions, such as buying a home, developing an estate plan, selling a business or contending with a divorce.

Navigating this ever-shifting tax environment requires new approaches for both planning and investing — and new vigilance to ensure tax-smart decisions in the face of ongoing changes and challenges.

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