All year long, we and other advisors, have talked about the uncertainty of the tax law. Consensus among experts and the general public is that income taxes will increase in 2011. Has the recent election changed the inevitable? With only a month left in 2010 what is yet to be decided? The answer is pretty much everything! But, here are a few big ticket items to keep your eye on during the December “lame duck session”.
Income Tax Rates are scheduled to increase for all taxpayers in January if new legislation is not passed by the end of the year. The highest marginal tax rate would go from 35% up to 39.6%. While there is debate about whether this would hurt the economy or not, it certainly will hurt your pocket book. The obvious way to offset this increase is to shift 2010 expenses into 2011 and accelerate income into 2010 as much as possible.
I prefer a strategy that pays yourself rather than the IRS or your vendors. Many people who have company sponsored retirement plans either do not max them out or forget they can still contribute to an IRA account. Make sure you are maxing out the tax advantages available to you. If you think you cannot set aside that extra savings for your financial future, start with finding it with a budget. Track your expenses for a month and replace the money you spend on items that do not provide for your needs or future financial security with savings or paying down debt.
Capital Gains Taxes are also schedule to increase from 15% to 20% and dividend income will be subject to ordinary tax rates, as high as 39.6% for those in the highest marginal tax rate. This aspect of the legislation is tricky because there is no reason to recognize the gains and pay taxes unless the rate does in fact increase in January. One strategy that can work no matter the legislation is to sell equities with losses to offset the gains from the sale the winners. Another strategy for small business owners is to pay dividends now before it increases next year. Be cautious of moving too quickly on this one, monitor it, and be ready at the final hour to act upon it.
A strategy that can really pay you back is to donate appreciated equities rather than cash to your charities. With this strategy you avoid the tax you would have paid to sell the equity and you get to deduct the full market value of the equities on your Schedule A. Make the contribution to a charity qualifying for Endow Iowa tax credits and you may also receive a 25% state of Iowa tax credit. Your total savings from taxes could be as high as 65% to 75% of the value of the investment. This strategy is one of the most efficient and most underutilized by taxpayers.
Estate Taxes are scheduled to revert back to the 2010 law. This means those estates that ordinarily would not have to file a tax return and pay taxes may be required to do so in 2011. With only a few weeks left in 2010, the best strategy for most people on this one is to wait it out. Once the new legislation is passed review your estate plan and tools in place to make sure they are still relevant in light of the new law.
Tax planning can always be challenging, but 2010 has proved to be even more so. While there are many tax ideas, your unique situation will dictate what is possible and makes the most sense for you. Contact our office to discuss tax strategies and learn about how we can help you make tax planning easier.