Congress Overshadowed by Tax Cuts
Congress is Currenlty voting on extending the Bush Tax Cuts for all taxpayers. The following article discusses the challenges of year end tax planning in this ever changing environment.
Year-end tax planning is an important annual exercise for many taxpayers. A certain amount of educated guesswork is involved in projecting what the current and subsequent year's tax profile will look like. Will taxable income be higher, lower or about the same? Year-end tax planning is made more complex this year because of uncertainty whether the individual tax rates will revert to the pre-Bush tax cuts. If they do, the top rates on ordinary income will increase from 35% to 39.6%. Up until recently, most Democrats, including President Obama, have supported and have been adamant to extending the current levels for the middle class, defined as families earning less than $250 thousand, and letting the pre-Bush higher rates apply to those earning more than $250 thousand. However, since the midterm elections, this tone has softened and there is some thinking that the lower rates will continue permanently for the middle class and temporarily (1 - 2 years has been suggested) for the higher earners. It remains to be seen what, if anything will happen during the Congressional lame- duck session with current thinking that nothing definitive will happen until the next Congress. There is some thinking that, given this uncertainty, tax planning may be turned upside down by accelerating taxable income into 2010 and deferring deductions to 2011. This would provide a hedge against rates increasing in 2011 with the downside that, if rates do not increase, taxes have been prepaid by a year. With today's interest rates, this may not be a significant risk. However, there are many other factors such as available cash flow and individual circumstances that should be taken into consideration. For example, a charitable contribution in 2010 would not be subject to an itemized deduction phase out in 2010 but could be in 2011. One important tax planning option to consider by the end of the year is the IRA/Roth conversion. The conversion would result in taxable income in 2010. However, most taxpayers will have until October 15, 2011, to reverse the conversion in the event, for example, the value of the IRA decreases in the subsequent year.
In the meantime, relief from the alternative minimum tax for 2010 looks promising. Lawmakers from both parties have written to IRS Commissioner Doug Shulman indicating they will enact legislation providing a "patch" that will allow most taxpayers to escape the alternative minimum tax in 2010.
There are more distant proposals from a White House-sponsored deficit panel that would increase taxes by $751 billion by 2020. These proposals include a cap on the top personal-tax rate at 28%, a compression of the current six tax brackets into three and lowering the bottom rates to 8% from the current 10% and 15%. The other side of this is proposals to eliminate so-called tax expenditures comprised of deductions, credits and other tax benefits that Congress adopted over a period of many years. These tax expenditures include deductions for mortgage interest, charitable deductions and state and local taxes, the exclusion of employer-provided health care from taxable income and, on the investment side, the lower tax rates for capital gains and dividends. All of this is sure to create lively debate from both sides of the aisle.
(Please note this subject is changing on a daily basis!)
Please contact Feeley & Driscoll's Boston Tax Firm by Email or call us at 1 (888) 875-9770.
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