Planning on tax refund next year? Good luck

6 hrs.

John W. Schoen , NBC News

Most financial experts advise that year-end is a good time to do a little tax planning by estimating how big a bite Uncle Sam is going to take next April 15.

This year, about the only advice they can give is: ?Good luck with that.?

With Congress and the White House locked in the final throes of an epic, two-year budget battle, estimating your taxes this year?is roughly equivalent to playing golf at night under a new moon.?

Not only are Democrats and Republicans playing chicken with the Jan.1 deadline to avoid the so-called ?fiscal cliff,? the terms of their conflicting proposals are shifting as the debate drags on.?

That means the tax code?s dozens of exemptions, deductions and exclusions ? each of which hits millions of taxpayers in different ways ? have created a geometric level of complexity to a process that already flummoxes the vast majority of Americans.

The biggest land mine looming at the bottom of the fiscal cliff is the so-called Alternative Minimum Tax, originally designed to minimize deductions for the wealthiest taxpayers. Because Congress forgot to include a provision that raised the dollar definition of ?wealthy? over time, the AMT is on course to rip a new financial hole through some 28 million tax returns for the first time this year.

?That would come as a big shock to some people because it?s not reflected in their 2012 withholding at all,? said?Tax Foundation?analyst Nick?Kasprak. ?So if you expect a $2,000 refund, suddenly you?ll owe $3,000 if you haven?t paid the AMT before.?

The rest of the tax increases now being haggled over would apply to 2013 income, which will be reported on your return in April 2014, and due then. But some provisions, like the possible increase in payroll taxes, would hit in January as those payments are deducted from your paycheck.

You may also voluntarily decide to increase the amount withheld from your earnings if it looks like other provisions will increase your final tax bill in 2014.? How do you know how much to withhold? You don?t. And you can?t know until the tax law is finalized, which may not happen until well into next year.

If a deal on the new law drags?on that long, anyone trying to file a return early next year?and get a refund runs the risk of having to go through the process twice. In a good year, it takes the IRS a couple of months to get set up to begin sifting through the more than 140 million returns. The further the talks drag on into next year, the bigger the delay in processing claims.

?They?re not going to process returns or issue refunds or do anything (until the law is written) because they?re going to have to adjust all their computers,? said Ian Cominsky, a tax attorney at Blank, Rome in Philadelphia. ?They may have to re-issue forms. They may have to extend the April 15 deadline.?

Financial planners and tax advisers say the prospect of a tax increase next year has upended much of the?advice they typically dispense. In past years, if you had investments that did well, for example, you might have deferred some or all of those capital gains ? to see if you had possible losses the following year to offset them. But with a capital gains tax hike on the table, you may be better off selling now at the lower rate.

Or not. If there's no deal by Dec. 31 (a Monday), ?you'll just have to guess what?the capital gains rate will be next year.?

Even in a good year, it?s all but impossible to generalize about the impact of changes in a tax system that includes six different rates based on?income brackets and five different filing statuses. It?s no surprise that if you give your financial data to a half-dozen accountants, the odds are pretty low that they?ll all come up with the same amount owed.

Now, add roughly 20 different ?scenarios? representing tax changes currently on the table. Do you have young kids? You?ll want to keep a close eye on political dickering over the child care tax credit. Older kids? You?ll have to wait to see what happens with education credits.?

Live in a state with high income and property taxes that you usually deduct on your federal return? You're a good candidate for the dreaded?AMT treatment. Usually take deductions for home mortgage interest, charitable donation or business expenses? Watch for a cap on how much they?re worth. Thinking about donating to your grandkids? college fund? You may want to do so this year to avoid a possible increase in gift taxes.

Even when a deal is reached, you?ll need an accountant ? or at least a good computer ? to figure out what it means for your individual return. There are a number of tax calculators that have popped up on the Web as the ?fiscal cliff? spectacle grinds on.

One of them, recently launched by the Tax Foundation at mytaxburden.org, lets you do a quick snapshot of the basic impact or drill down and compare the impact of dozens of?specific provisions. The app also creates a comparison between the current law (if nothing is done), along with?the broad outlines of the Republican proposal and the White House?s basic plan.

Both of which will likely change as the real horse trading begins.

Source: http://www.nbcnews.com/business/economywatch/planning-tax-refund-next-year-good-luck-1C7425955

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