John Bullis: Oft-changing tax laws make planning a challenge

No one knows what the tax laws will be in a couple of years. Some think the 15 percent capital gains tax will be increased to maybe 20 percent or even 28 percent for very high-income taxpayers. Congress seems slow to act, so probably not much will change until after 2014.

The primary problem with constant changes to our tax laws is that the uncertainty makes long-term planning difficult. Not having several years of the same rules and rates gives an unsettled feeling. That causes some folks to not take the actions they would consider taking if they just knew what the rules would be for the next few years. Without action, national productivity suffers. The economy just sort of bounces along, waiting for the next change.

An example is when a big sale is done on the installment method, with payments to be made over the next 10 years. You “elect out” of the installment method, in which you pay tax in the year of sale on the entire gain. Then in the future years only the interest will be taxable income, or you could use the installment method of reporting the gain on the sale with some of the gain reported each year as you receive the payments. If the future tax rate is certain and you can estimate your other income, the decision can be easy.

However, if you think the long-term capital gains tax rate is likely to go up, maybe you can save money by “electing out” of the installment sale. The main thing is to not take actions just to try to save some tax. Only do the things that make financial sense, help meet your goals and allow you to sleep better at night.

Some folks are considering selling some stock before the tax rates change to a higher percentage. They probably can wait until late 2014, when we may know what Congress has done on changing the tax laws. If the sale would recognize a loss for tax purposes, maybe it is best to sell, recognize the loss and get the income tax savings. The conversion of a regular IRA to a ROTH IRA might be done. I’ve heard that some folks think Congress will “do away” with the ROTH IRA. I’ll be surprised if that happens. Too many have already invested in ROTH IRAs. To change that now might result in members of Congress not getting re-elected.

Did you hear? “Advice would be more acceptable if it didn’t always conflict with our plans.”

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.