Many find it hard to plan ahead as tax uncertainty looms

ByABC News
March 22, 2012, 4:40 PM

— -- During tax season, it's not unusual for individuals and business owners to talk with accountants, enrolled agents and financial planners about long-term strategies to lower their taxes.

This year, though, even veteran advisers are unable to offer much more than a shoulder to cry on.

Barring congressional action, the broad tax cuts adopted during the George W. Bush administration will expire at the end of the year, with the top income tax rate rising to 39.6%. Taxes on capital gains and dividends will also increase, the alternative minimum tax will spread like kudzu, and taxes on estates will soar. The marriage penalty will return, a lucrative tax credit for parents will be cut in half, and the payroll tax withheld from workers' paychecks will rise to 6.2% from 4.2%.

Any resolution to head off this battery of tax increases is unlikely to come until after the November presidential election. In the meantime, taxpayers are paralyzed, tax preparers and financial planners say.

Tax uncertainty "is holding back a lot of business investment," says William McBride, economist for the Tax Foundation, a non-profit that supports lower taxes. "Everyone, left, right and center, agrees that this is very damaging for businesses and individuals in their economic decision making."

Tiffany Washington, owner of Washington Accounting Services in Waldorf, Md., says the standoff about extending the payroll tax cut caused her to put off hiring another employee.

In December, Congress passed a two-month extension of the payroll tax cut, which added about $40 to the average worker's paycheck. Washington says she was concerned that a drop in take-home pay at the end of the two-month period could lead the new employee to leave for a higher-paying job.

In February, Congress agreed to extend the tax cut through 2012. By that time, Washington says, it was too late to train someone for the 2012 tax season.

One of Washington's three employees recently had to take a leave of absence for medical reasons, leaving her short-handed. That has forced Washington, who has owned the business for five years, to work 70 to 80 hours a week during tax season.

Washington has the advantage of knowing her way around the tax code. That's not the case with many self-employed and small-business owners who can't afford a chief financial officer to help them navigate the constantly changing tax laws, says Kristie Arslan, chief executive officer of the National Association for the Self-Employed.

With the tax code constantly in flux, she adds, "they don't know how to plan or what to do."

How tax uncertainty is affecting different groups of taxpayers:

Individuals

Currently, tax rates for ordinary taxable income range from 10% to 35%. If the Bush tax cuts expire, those rates will rise to 15% to 39.6%.

President Obama has proposed making the Bush tax cuts permanent for taxpayers with income of less than $200,000 ($250,000 for married couples). Congressional Republicans, who currently control the House, favor extending all the Bush tax cuts. The leading contenders in the Republican presidential primary favor reducing current tax rates on income.

Rates aren't the only wild card facing families, though. Other tax issues that are unresolved include: