Houdini or hoodwinkery?

The new tax law performs more now you see it, now you don't tricks than a magician at a trucking convention. For instance, there are reductions in each individual tax rate that will help owners, workers and companies organized as S corporations, partnerships and proprietorships. But C corporations get no rate relief. Furthermore, seemingly similar individuals will get very different tax reductions.

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The new tax law performs more “now you see it, now you don't” tricks than a magician at a trucking convention. For instance, there are reductions in each individual tax rate that will help owners, workers and companies organized as S corporations, partnerships and proprietorships. But C corporations get no rate relief.

Furthermore, seemingly similar individuals will get very different tax reductions. How big a cut you receive depends not just on your overall income level, but your family status, the state you live in, how much depreciation you claim on equipment, and other hocus-pocus.

The sleight of hand that produces this uneven result is the alternative minimum tax. The AMT has been called the “parallel universe” of the tax code because taxpayers must recalculate their entire tax bill, adding back deductions claimed for state and local income taxes and a portion of depreciation, among other adjustments. The new law suspends the AMT for most taxpayers for the next three years, but then dramatically increases the number who will have to pay it in future years — unless a subsequent Congress comes to the rescue.

In what may be the law's best David Copperfield impression, the estate tax fades away bit by bit, then disappears altogether in 2010. But the illusion vanishes at the stroke of midnight on January 1, 2011, when the entire tax law comes back just as it was before the bill was signed last month.

Like the sorcerer's apprentice, Congress seems to have gotten carried away with all the types of tax cuts it wanted to put in the bill, conveniently forgetting that it had voted just weeks before to limit the overall reduction to $1.35 trillion over 10 years. Rather than give up on any of the goodies, the bill's authors stuffed the full amount into nine years, then pretended all of the tax cuts would go away in year 10. Of course, the apprentice actually hoped that a real magician would come along in the meantime and make all the goodies permanent.

It does appear likely that some of the favorable changes will last. For example, the new law creates a tax credit to help small employers offset the cost of starting a retirement plan. Workers who have their money locked up in different kinds of retirement savings will be able to roll over the savings into a single plan. These and other changes are likely to remain popular with both parties and will cost far less to make permanent than the AMT or estate tax relief.

Meanwhile, the high cost of the overall bill, combined with unexpectedly low revenue from a sluggish economy, may eliminate the prospects for a second tax bill, which businesses hoped would emphasize business tax relief. In particular, some trucking interests had counted on a second bill to provide a speedup of the deduction for drivers' meals, immediate full deductibility of health insurance for the self-employed, and perhaps a rollback of the fuel tax.

The bottom line: Is your tax cut half full or half empty? If you're an optimist, you may conclude that this Congress has cleverly forced future Congresses into making good on the promises this bill puts in place. If you're a pessimist, you might cite the extensive tax increases that Congress passed, and Republican presidents signed, after the 1981 and 1986 rate cuts. Unfortunately, the bill is more than a personality test: The wisdom of decisions you make today on how to run your company — or pass it on to successors — will depend a lot on which provisions remain intact.

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