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Long-Range Tax Planning, Nine Days At A Time

Dear U.S. Senators: Have you ever considered that when you change the nation’s tax laws with nine business days remaining in the year, and for just two months at a time, you force the rest of us to join in your game of Tax Table Twister?

In my company, for example, employees ordinarily would be paid on the first business day of January, which will be Tuesday, Jan. 3. In order to pay them, I need to withhold Social Security tax. And in order to do that, I need to know the Social Security tax rate.

I suppose you thought you were being helpful Saturday when you voted to extend this year’s “temporary” 2-percentage-point cut in the employees’ tax rate through the end of February. You don’t have to pay your staff, or a payroll service, to stay up-to-date with this sort of last-minute change. Therefore, you don’t concern yourself with the fact that we have to adjust our plans now and, if you get your way, once again in just two months.

But we can’t make that adjustment yet, because we still have to see whether the House of Representatives will go along with your silly vote-again-and-again-because-it’s-an-election-year approach. The House has already passed a full year’s extension of the 2 percent tax cut, which is exactly what both parties’ leaders in the Senate say they want. But since Democrats, who have the Senate majority, don’t like the House’s terms but cannot really do anything about it, your approach was to enact the cut for two months and then fight about it again in 2012.

President Obama assured us Saturday that further extension of the cut will be just a “formality.” If anyone thought he actually believed this, we would all be seriously concerned about the president’s mental health. Obama has been pushing for this extension since he rolled out his dead-on-arrival American Jobs Act in September. But since Democrats and Republicans vigorously disagree over how to pay for the tax cut extension, its approval has been anything but a formality.

There is a good chance House Republicans will reject your two-month ploy, perhaps as soon as today, though I think House leaders will probably refrain from bringing it to a vote if there is a risk it will fail. Instead, there will be still more negotiation, maybe even over the Christmas weekend, and even less lead time for employers and workers to prepare for whatever is coming.

My staff and I were able to sidestep all this nonsense for the time being, because I have already decided to accelerate our first January payroll to Dec. 31. This means my workers will still enjoy the reduced Social Security tax rate that applies through 2011, no matter what Congress does with the extension. It also means I don’t have to worry that lawmakers will drag out this process so long that my payroll service will not be able to catch up.

I made this decision, not because I anticipated that Congress would drag out this issue to the last possible moment (though I should have known that might happen), but for unrelated reasons. We pay our staff via direct deposit, so the funds leave our business bank account several days before pay day. Since I am expending the cash in 2011, I want the business to be able to take its related tax deduction this year, too. That is why I moved up our pay day. Usually, the employees would not care one way or the other, because their own income taxes are covered by withholding. But as it happens, for staff who have not already reached the Social Security wage ceiling in 2011, I may have guaranteed an extra tax benefit if it turns out that the 2 percent cut does not make it into the law for 2012.

This really is a ridiculous way to run a country, particularly a country with the world’s largest economy. Frankly, I hope the House sticks to its guns and forces you senators to come back and pass the extension for all of 2012, if an extension gets passed at all. Democratic senators, and Obama, think there is a winning political argument in painting Republicans as being opposed to a Social Security cut that benefits the middle class. So be it. Republicans will counter that the cuts are further undermining Social Security’s long-term financial position, something Obama has not deigned to address since taking office. Senior citizens and baby boomers approaching retirement can show their appreciation on Election Day.

In the meantime, speaking for those of us who have to work and run businesses in the real, profit-making (or at least profit-seeking) economy, let me just say that it is absolutely not okay to change tax laws on near-zero notice whenever the spirit moves you. If you senators actually had to live with the laws you write, you might understand why. Tax Table Twister looks like a game to you, but out here, it’s serious business.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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One Response to "Long-Range Tax Planning, Nine Days At A Time"

  • Steven J Fromm
    December 19, 2011 - 9:36 pm

    I cannot agree with you more. These guys in congress are clueless. Do not even get me started with the problems they have created for my clients when it comes to estate tax planning. How can anyone allow their taxpayers to be in estate tax limbo for years and fail to come up with some certainty, so people can plan for their family? Just deplorable. They are bad problem solvers and are out of touch with reality.