As advisors ponder year-end tax strategies, they're finding anything but solid footing for making moves and optimally positioning clients for the future. Why? That little deficit tussle in Washington.

"Most everything I'm seeing indicates the 12-member 'super committee' is going to raise revenues," Susan Hartman of Raymond James said before Labor Day. It is possible that some new rules could take effect next year, or be phased in over several years, according to Hartman, a senior tax and estate planning consultant in the St. Petersburg, Fla., home office.

However, Congress must say yay or nay to the committee's suggestions before Christmas. If they are approved, the changes could become effective upon enactment, potentially quashing financial planning strategies that are currently available. Or worse, changes could be made retroactive to January 1, 2011.

These mind-boggling possibilities are chilling for financial plans right now. Hartman is telling her advisor network, "Make year-end moves that make sense, but also prepare 'if-then' plans now so that you are ready to act when the super committee's recommendations come in."

In the meantime, advisors can only forge ahead based on current law. Even so, planning hinges partly on what you anticipate happening in Washington.

Recharacterizing 2010 Roth Conversions
Monday, October 17, is the deadline to recharacterize a 2010 Roth conversion. Last year was the first time anyone, irrespective of income, could convert a traditional individual retirement account to a tax-free Roth, so long as they paid ordinary tax on the amount converted. Now the final day of reckoning is at hand.

A prime motive for recharacterizing is a drop in the account since the conversion. If the value has fallen, sticking with the conversion means the client pays tax on wealth that has evaporated-ouch. Unfortunately, advisors say there is no definitive answer about how much of a decline merits recharacterizing.

A change in the client's overall objectives is also grounds for undoing a conversion, says life planner Michael Kay, president of Financial Focus in Livingston, N.J. "Maybe their cash flow or estate-planning needs have changed," Kay posits.

Another reason to recharacterize is to avoid the irksome pro rata rule. "This is for the client who has some IRAs funded with pretax contributions and some funded after-tax," says Harold Weston, a clinical assistant professor of risk management and insurance at Georgia State University in Atlanta.

Converting the after-tax IRAs might seem like a clever way to pay tax only on the investment gains in those accounts, but no. When the client also has pretax IRAs, "he must make a computation under the pro rata rule that could render most of the after-tax IRA conversion taxable, as well as require painstaking paperwork during the withdrawal years," Weston says. Recharacterizing escapes this nightmare.

Political goings-on may influence the decision, too. A revised outlook for future tax rates, coupled with a distasteful $450,000 tax bill for converting, led one of Sue Clark's clients to call off his 2010 conversion several weeks ago. "Last year, we were convinced tax rates were going up. Now we're not so sure they are, at least not in the near future, so he decided to continue to defer the tax rather than pay it now," says Clark, a CPA and tax principal with Larson Allen in Minneapolis.

On the other hand, if you expect tax rates to climb, "that's a reason, even if the account has gone down, to hold on to the Roth," counters Benjamin Tobias, a CPA/planner and president of Tobias Financial Advisors in Plantation, Fla. You decide.

Finally, tell your clients who are prone to vacillating that if they recharacterize their 2010 conversion and subsequently change their minds (i.e., wish to reconvert), they must wait more than 30 days after recharacterizing to put the money back into a Roth, says Michael J. Jones, a partner in the Monterey, Calif., CPA firm Thompson Jones LLP. With the markets in chaos, a lot can happen in that span.

Gains For Nothing, And Basis Reset For Free
As Tobias projects clients' 2011 tax situations, especially his retirees with emaciated interest income, he's keeping an eye out for couples with taxable incomes below $69,000 and for single clients under $34,500. They pay no tax on long-term capital gains that bring their incomes up to these amounts. "When gains aren't going to be taxed, we do tax-gain harvesting," Tobias says.

After taking a gain, sometimes he will buy the fund right back. This re-establishes the holding's basis at a higher value, which lowers the tax when it is later sold. This isn't a wash-sale because it involves a gain, not a loss, Tobias notes.

Get While The Getting's Good
To help clients optimally time deductions, look for breaks scheduled to expire after this year. Included here are the above-the-line deduction for college tuition and fees, as well as the option to itemize state and local sales taxes instead of income taxes. Giving to charity directly from an IRA without counting the withdrawal as income is also in its final year (again), according to Mark Luscombe, the principal federal tax analyst at CCH Inc.

Beginning January 1, 2013, a Medicare surtax of 3.8% can apply to couples with joint incomes greater than $250,000 and to single filers above $200,000. (For details, see "Coming Down The Pike," in the June 2010 issue of Financial Advisor.) Consider realizing gains before the surtax kicks in, Raymond James' Hartman suggests.

Similar thinking has CPA/planner Michael Tedone focused on his executive clients' stock options and restricted stock. Blackout periods could keep these clients from acting as 2013 nears, he fears. "So we're talking to them about accelerating exercises over the next 15 months," says Tedone, the chief compliance officer at Filomeno Wealth Management LLC, in West Hartford, Conn.

Regarding transfer taxes, the gift tax exemption increased to $5 million this year, unifying it with the estate tax, and the rate for both levies is now 35%. These attractive parameters expire at the end of 2012, but don't let clients wait until the last minute to gift, recommends estate planner Katie Colombo. "We're telling clients to act now because Congress could close this window at any time," says Colombo, an attorney at Oshins & Associates LLC, in Las Vegas.

"But there is a potential for clawback, or recapture," warns Clark, the Minneapolis CPA. Suppose a client gifts $5 million tax-free under current rules. Further suppose that after 2012 the estate tax returns to a $1 million exemption, which will happen without any new legislation, and the client dies then. In that case, many observers interpret current law to say that the estate would owe tax on $4 million-the amount gifted tax-free during life ($5 million) minus the exemption allowed at death ($1 million).

The profession widely expects Congress to clarify that gifts which are tax-free when completed remain tax-free upon death. Still, "The potential for clawback is something clients should be aware of before undertaking a gifting strategy," Clark says. Advisors need to ensure the estate has liquidity to cover the tax if the recapture ultimately applies, she adds.

Estate Tax Portability For Recent Deaths
Under a new rule, married decedents who don't use their full $5 million gift-and-estate-tax exemption may pass the unused portion to their surviving spouse, who may then add it to his or her own exemption. Portability provides "a hedge against future appreciation in the surviving spouse's estate," says Terry Headley, president of Headley Financial Group in Omaha.

To benefit under current law, both spouses would have to perish in 2011 or 2012. "We don't know if portability will be extended," says Headley. To preserve the first-to-die's unused exemption in the event portability is extended, an estate tax return must be filed for the first death and an election made. The return is due within nine months of the death plus extensions, so the clock is ticking on 2011 passings.

Depreciation Deductions Gone Wild
For business owners, the Section 179 depreciation deduction remains at its highest level ever, according to CCH's Luscombe. As much as $500,000 of the total purchase price of all new and used equipment placed in service in 2011 can be deducted on this year's business tax return, rather than spread over the life of the assets. The Section 179 deduction phases out for businesses that buy more than $2 million of qualifying property this year.

But the real action is with 100% bonus depreciation, which likewise provides an instant deduction for an asset's entire cost. Only new property qualifies for bonus depreciation. But there is no limit on how much a business can buy and write off. Better still, the deduction can be used to create a net operating loss (whereas Section 179 expensing generally can't), which in turn can nab the client a refund of previously paid taxes or offset future years' income, says Filomeno's Tedone.

Come 2012, both Section 179 depreciation and bonus deprecation offer smaller savings.

Another tip for business clients: Self-employed individuals qualify for the 2% Social Security tax holiday salaried workers are enjoying this year. The break applies to the first $106,800 of net self-employment income and should be figured into estimated tax payments.