Future Tax Changes

Future tax changes are “unusually uncertain”.

This description, borrowed from Fed Chairman Ben Bernanke’s recent remarks on the economic outlook, applies equally to the outlook for U.S. income tax and estate tax laws.

The “unusual uncertainty” arises because it is really anybody’s guess what Congress will or will not do, when they might do it (currently out of session until after mid-term elections), and how the President will react to whatever they decide (if they decide anything).

If Congress fails to act before year-end, income taxes will increase across the board for all taxpayers next year. In addition, estate taxes will increase to pre-Bush-tax cut levels – 55% for estates over $1 million.

So, what’s the poor taxpayer to do?

Our best advice is to be prepared for the worst case, that is, that taxes will increase in both areas – income and estate tax – beginning next year. With this worst case scenario in mind, following are several matters to consider in preparing for your 2010 income taxes.

Income Taxes

Taxpayers might consider accelerating income into 2010, when it will be taxed at lower rates. Taxpayers may also consider deferring deductions to 2011, when they will be used to offset income, which would otherwise be taxed at higher rates.

Accelerate Income

Expecting a year end bonus? If you can control the time of payment, you save tax dollars by receiving your bonus in 2010 rather than 2011 when rates will increase.

Roth IRA conversions. We have written about this before, but if conversion or partial conversion is appealing, you may want to elect to convert in 2010 rather than future years.

Exercise non-qualified stock options. Follow the same idea here – earlier exercise will result in paying taxes in 2010 at a lower rate than 2011.

Recognize Capital Gains in 2010. Rates are scheduled to increase from 15% to 20%, an increase of 33%. Obviously, there are investment considerations here as well, but if you are contemplating a sale in the near future, 2010 would be better than 2011 from a tax standpoint.

If you have an IRA and turned 70 ½ in 2010, consider taking your first required minimum distribution (“RMD”) during 2010, rather than waiting until 2011 when you would be required to take your first and second RMDs in the same year with higher rates.

Defer Deductions

If you are can defer deductions into 2011, they will be more valuable in saving on your taxes. For example, you might consider deferring the following until 2011:

Payment of business expenses
Deferring significant charitable deductions
Defer property taxes (if not in Alternative Minimum Tax)
Defer state income tax payments

Please note: Every individual tax situation is unique and calculating the impact of these changes is complicated. Further, this is by no means an exhaustive list and, depending on your particular circumstances, there may be other considerations or actions you should take. If it is possible to defer action on your strategies until later in the year, we may have some clarity on the 2011 tax changes which could impact a decision. However, if we receive clarification, there will be a short window to effect changes before the end of the year.

Estate and Gift Taxes

Again, expecting the worst outcome, that we revert to a lifetime exemption of $1 million per person and a 55% marginal rate, there are actions which may make sense to contemplate in 2010. The lifetime gift exclusion remains at $1 million and the annual gift exclusion at $13,000. However, we don’t have any general recommendations. This is because appropriate decisions are highly dependent on your particular goals and objectives and your particular family and estate circumstances. This is an area which requires substantial thought and planning.

Conclusion – Be Prepared

Now would be a good time to assess your cicumstances, organize your thoughts and determine whether or not you should take any action. If you would like some help in understanding your own situation, please call us.

As for the rest of the story…stay tuned.

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Horizon Wealth Advisors
Horizon Wealth Advisors
Horizon Wealth Advisors is a Houston-based, privately owned, fee-only financial advisor established in 1999. Our mission is to develop long-term relationships with thoughtful, successful individuals, families, and organizations by supporting and assisting them in achieving their financial goals.

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