More Tax Change? by Carolyn Flaherty

A quick review of the history of the United States income tax from the vantage point of personal income taxes, (not to mention the estate and gift tax, partnership & corporate taxation, etc.), reveals that the mind numbing technological revolution that has brought us from the advent of the personal computer in the 1970's to today's broad use of smart phones, tablets and touch screen technology in a mere 5 decades is occurring along side a less heralded tax revolution.

Many of you would be shocked to know that before 1913 our fine country was financed almost exclusively via tariffs on imported goods. In fact, the legality of federally collected personal income tax was largely questioned until the passing of the Sixteenth Amendment to the Constitution in 1913. The Sixteenth Amendment explicitly grants Congress the right and the power to collect tax on personal income.

Since 1913 the Tax Code has been reformed, and some would say complicated, at a stunningly frequent pace. Indeed in the past 10 years alone it is estimated that the Code has been revised approximately 4000 times. There are currently over 9000 sections to the Code. Furthermore, the instructions for the original Form 1040 were but one page and now total 174 pages!

Imagine: a brief 100 years has taken personal income tax from an almost unheard of concept in the United States to quite possibly the most common political agenda and debate in our country. In 1913 an amendment had to be passed to confirm the legality of the federal government to collect! Yet, less than 100 years later we lament that the only sure things in life are "death and taxes."

As a tax preparer, I indeed consider these rapid changes and the complicated Code to be job security. Moreover, if ever I doubted the necessity of my work, the Tax Code consistently reaffirms my worth to the public as a tax professional. However, when I became a public accountant I veered to the tax consulting side of our practice because I liked the feeling of being able to help clients. Offering tax planning in this environment of instability is increasingly difficult. Due to the uncertainty and the constant call for tax reform along with, for example, provisions that sunset after a decade and then are up for extension annually: we are forced to offer a shorter term verse long term plan for tax savings.

The concepts that will stand the tests of time are sound financial judgment and living within your means. These can be practiced regardless of the state of tax reform and is the advice I offer most often. Contribute the maximum to your 401K, set up flexible medical savings accounts, consider a 529 College savings plan, be charitable AND consult your financial advisor in conjunction with your tax advisor to consider current year end strategies that will maximize your overall tax and financial position.

Just for fun I have bulleted some facts about our United States personal tax history. Below that I have bulleted some of the most recently released changes that may affect you in 2012.

Just for fun:

• 1861: First personal income tax was imposed to finance the Civil War
• 1862: Bureau of Internal Revenue was created (predecessor of the IRS)
• 1872: The income tax was repealed
• 1913: Sixteenth Amendment was ratified to Constitution granting Congress the power to collect tax on personal income
• 1914: First income tax form (The 1040) was released
• 1915: The lowest tax bracket was taxed at a rate of 1% .The top bracket was 7% on income over $500,000
• 1950 : Tax rate for highest bracket peaked at 92% (for those with incomes greater than $400,000)
• 1952: Income tax peaked in the bottom bracket at 22.2%
• 1981: Largest tax cut in US History
• 1986: President Reagan signed into law the Tax Reform Act of 1986 starting an almost annual tradition of new tax acts.

A sampling of what's new in 2012:

• Personal exemptions increased to $3,800
• Standard deduction increased to $11,900 married filing jointly (MFJ), $5,950 Single and $8,700 head of household
• Tax bracket thresholds also increased for each bracket
• Maximum earned income credit increased to $5,891: Qualifying income limit to $50,270
• Foreign earned income deduction increased to $95,100
• Phase out levels for the lifetime learning credit now start at $104,000 MFJ and $52,000 for single filers
• The phase out for the deduction of student loan interest starts at $125,000 MFJ
• Monthly limit for qualified parking expenses provided by an employer is now $240