President Obama has been reelected, the Senate will remain in the hands of the Democrats (but without a filibuster-proof supermajority) and the House will continue to be controlled by the Republicans. In other words, the political makeup of Washington will be about the same in 2013 as it is now. As a result, it’s still very uncertain what will happen with tax law changes.

When it comes to tax law, Congress and the president have much to address, including tax breaks that expired at the end of 2011 as well as the rates and breaks that are scheduled to expire at the end of this year.

The “lame duck” session is scheduled to begin next week, but Congress will soon break again for Thanksgiving. How long it will be in session from after Thanksgiving through the end of the year is up in the air.

It’s still unclear what Congress will try to accomplish in the lame duck session — and what they’ll punt to next year. (In terms of the latter, tax law changes could be made retroactive.)

The lack of change in the political makeup of Washington could make it very difficult to pass tax legislation, considering how far apart the parties are on what should be done. Yet now that both parties know the outcome of the Nov. 6 elections, they may be more willing to compromise.

Whatever happens, it could have an impact on your year end tax planning. So keep an eye on Congress before implementing year end strategies.

In recent years, restricted stock has become a popular form of incentive compensation for executives and other key employees. If you’re awarded restricted stock — stock that’s granted subject to a substantial risk of forfeiture — it’s important to understand the tax implications.

Income recognition is normally deferred until the stock is no longer subject to that risk or you sell it. You then pay taxes based on the stock’s fair market value (FMV) when the restriction lapses and at your ordinary-income rate.

But you can instead make a Section 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, can be beneficial if the income at the grant date is negligible or the stock is likely to appreciate significantly before income would otherwise be recognized. Why? Because the election allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.

There are some disadvantages of a Sec. 83(b) election:

1. You must prepay tax in the current year. But if a company is in the earlier stages of development, this may be a small liability.

2. Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or its value decreases. But you’d have a capital loss when you forfeited or sold the stock.

If you’re awarded restricted stock before the end of 2012 and it’s looking like your tax rate will go up in the future, the benefits of a Sec. 83(b) election may be more likely to outweigh the potential disadvantages.

The long-term capital gains rate is currently 0% for gain that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate. But the 0% rate is scheduled to expire after 2012. To lock it in, you may want to transfer appreciated assets to adult children or grandchildren in one of these tax brackets in time for them to sell the assets by year end.

Before acting, make sure the recipients you’re considering won’t be subject to the “kiddie tax.” This tax applies to children under age 19 as well as to full-time students under age 24 (unless the students provide more than half of their own support from earned income). For children subject to the kiddie tax, any unearned income beyond $1,900 (for 2012) is taxed at their parents’ marginal rate rather than their own, likely lower, rate. So transferring appreciated assets to them will provide only minimal tax benefits.

It’s also important to consider any gift and generation-skipping transfer (GST) tax consequences. You can exclude certain gifts of up to $13,000 per recipient in 2012 ($26,000 per recipient if your spouse elects to split the gift with you or you’re giving community property) without using up any of your lifetime gift tax exemption.

The GST tax generally applies to gifts made to people more than one generation below you, such as your grandchildren. This is in addition to any gift tax due. But annual exclusion gifts are generally exempt from the GST tax, so they also help you preserve your GST tax exemption for other transfers.

Finally, keep an eye on the Nov. 6 elections and Congress — it’s possible the 0% rate could be extended beyond 2012 or even expanded to include more taxpayers.

If you have a traditional IRA, you might benefit from converting all or a portion of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages: Roth IRAs don’t require you to take distributions during your life, so you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.

The downside of a conversion is that the converted amount is taxable in the year of the conversion. But there are a couple of reasons why 2012 may be the right year to make the conversion and take the tax hit:

1. Saving income taxes. Federal income tax rates are scheduled to increase for 2013 and beyond unless Congress extends current rates or passes other rate changes. So if you convert before year end, you’re assured of paying today’s relatively low rates on the conversion. In addition, you’ll avoid the risk of higher future tax rates on all postconversion growth in your new Roth account, because qualified Roth IRA withdrawals are income-tax-free.

2. Saving Medicare taxes. If you convert in 2012, you don’t have to worry about the extra income from a future conversion causing you to be hit with the new 3.8% Medicare tax on investment income, which is scheduled to take effect in 2013 under the health care act. While the income from a 2013 (or later) conversion wouldn’t be subject to the tax, it would raise your modified adjusted gross income (MAGI), which could cause some or all of your investment income in the year of conversion to be hit with the Medicare tax.

Likewise, you won’t have to worry about future qualified Roth IRA distributions increasing your MAGI to the extent that it would trigger or increase Medicare tax on your investment income, because such distributions aren’t included in MAGI. While traditional IRA distributions won’t be subject to the Medicare tax, they will be included in MAGI and thus could trigger or increase the Medicare tax on investment income.

Many businesses may benefit from purchasing assets by Dec. 31 to take advantage of depreciation-related deductions that are scheduled to either disappear or become less favorable in 2013:

Bonus depreciation. For qualified assets acquired and placed in service through Dec. 31, 2012, this additional first-year depreciation allowance is, generally, 50%. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software. With a few exceptions, bonus depreciation is scheduled to disappear in 2013.

Section 179 expensing. This election allows a 100% deduction for the cost of acquiring qualified assets, and it’s subject to different rules than bonus depreciation. On the plus side, used assets can qualify for Sec. 179 expensing. On the minus side, a couple of rules may make Sec. 179 expensing less beneficial to certain businesses:

• For 2012, expensing is subject to an annual limit of $139,000, and this limit is phased out dollar for dollar if purchases exceed $560,000 for the year. So larger businesses may not benefit.
• The election can’t reduce net income below zero. So for businesses that are having a bad year, it can’t be used to create or increase a net operating loss for tax purposes.

The expensing and asset purchase limits are scheduled to drop to $25,000 and $200,000, respectively, in 2013.

These depreciation opportunities, however, bring with them a challenge: Determining whether the larger 2012 deductions will prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules.

In some situations, future deductions could be more valuable. For example, tax rates for individuals are scheduled to go up in 2013, which means flow-through entities, such as partnerships, limited liability companies and S corporations, might save more by deferring the deductions.

Finally, keep an eye on Congress: It’s possible the current versions of these breaks could be extended or even enhanced.

Income tax generally applies to all forms of income, including cancellation-of-debt (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.

Debt forgiveness isn’t the only way to generate a tax liability, though. You can have COD income if a creditor reduces the interest rate or gives you more time to pay. Calculating the amount of income can be complex, but essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit. You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure.

Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners can exclude from their taxable income up to $2 million in COD income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). But the exclusion is available only for debts forgiven (via foreclosure or restructuring) through 2012.

QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn’t available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement (such as paying off credit cards).

If you exclude COD income under this provision and continue to own your home, you must reduce your tax basis in the home by the amount of the exclusion. This may increase your taxable gains when you sell the home. Nevertheless, the exclusion likely will be beneficial because COD income is taxed at ordinary-income rates, rather than the lower long-term capital gains rates. Plus, it’s generally better to defer tax when possible.

So if you’re considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion while it’s available.

After being in session for only two weeks in September, Congress has now adjourned until after the November 6 elections — without reducing any tax law uncertainty. The “lame duck” session is the next possibility for legislative activity. The Senate will return for the week of Nov. 15, break for the week of Thanksgiving and return again on Nov. 29 for a period of time yet to be determined. The House’s schedule likely will be similar.

Congress has a full plate awaiting them in the lame duck session. This includes addressing tax breaks that expired at the end of 2011 as well as the rates and breaks that are scheduled to expire at the end of this year.

The results of the election should shed some light on what Congress will try to accomplish in the lame duck session — and what they’ll punt to next year. (In terms of the latter, tax law changes could be made retroactive.)

According to popular wisdom, the Republican leadership may be more likely to strike an agreement with Democrats on the substance of extending tax cuts if President Obama is re-elected. If Gov. Romney is elected, Republicans would have less reason to compromise.

Other election results that will affect legislative action are which party will control the Senate and by what margin. The Republicans are expected to retain control of the House, but also significant will be how many of the Tea Party members elected two years ago retain their House seats.

As tax law uncertainty continues, year-end tax planning remains a challenge. It’s a good idea to perform a year-to-date review of your income, deductions and potential tax now. That way you can be ready to take quick action once it’s clear what, if any, tax law changes Congress will make before year-end.

It depends on the amount of your gain, your tax filing status, and your modified adjusted gross income (MAGI). If the gain on the sale qualifies for the home sale exclusion of $250,000 ($500,000 on a joint return), then you don’t have to worry about any additional Medicare tax on the sale. The Patient Protection and Affordable Care Act that created the new Medicare tax did not change the home sale exclusion. However, if you have any gain over the exclusion amount, the excess is treated as investment income for purposes of the tax. You’ll owe the tax only if your MAGI exceeds a threshold amount for your filing status (e.g., over $200,000 if you’re single or $250,000 if you’re married filing jointly).

Currently, if your eligible medical expenses exceed 7.5% of your adjusted gross income (AGI), you can deduct the excess amount. But in 2013, the 2010 health care act increases this “floor” to 10% for taxpayers under age 65.

Eligible expenses can include health insurance premiums, medical and dental services and prescription drugs. Expenses that are reimbursed (or reimbursable) by insurance or paid through a tax-advantaged health care account (such as a Flexible Spending Account or a Health Savings Account) aren’teligible.

To potentially be able to deduct more health care costs, consider “bunching” nonurgent medical procedures and other controllable expenses into alternating years. For example, if your year-to-date medical expenses already exceed 7.5% of your projected 2012 AGI and you’re anticipating elective surgery or major dental work in early 2013, you could instead schedule it for this year. Or you could stock up on prescription meds (to the extent allowed) and buy new contact lenses or glasses before year end.

Bunching expenses into 2012 may be especially beneficial because of the scheduled floor increase. But keep in mind that, for alternative minimum tax purposes, the 10% floor already applies. Also, if tax rates go up in 2013 as scheduled, your deductions might be more powerful then. Finally, be aware that the floor increase could be repealed by Congress.

Veterans provide a valuable labor pool, full of highly trained, hard-working team players with strong leadership skills. There’s also a tax incentive: The VOW to Hire Heroes Act of 2011 extended the Work Opportunity credit through 2012 for employers that hire qualified veterans. It also expanded the credit by:

• Doubling the maximum credit — to $9,600 — for disabled veterans who’ve been unemployed for six months or more in the preceding year,
• Adding a credit of up to $5,600 for hiring nondisabled veterans who’ve been unemployed for six months or more in the preceding year, and
• Adding a credit of up to $2,400 for hiring nondisabled veterans who’ve been unemployed for four weeks or more, but less than six months, in the preceding year.

To be eligible for the credit, you must take certain actions before and shortly after you hire a qualified veteran. We can help you determine what you need to do.