Part 1 of 3
The midterm elections have changed the Congressional landscape, with Republicans winning control of the House of Representatives and picking up seats in the Senate. Even so, it's still too early to know exactly how this will affect open tax issues for 2010 and 2011.
Specifically, when the “lame-duck” Congress returns this month, it must decide whether to “patch” the alternative minimum tax (AMT) for 2010 (increase exemption amounts, and allow personal credits to offset the AMT), as it has done in past years. It also must decide whether to retroactively extend a number of tax provisions that expired at the end of 2009. These include, for example, the research credit for businesses, the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes, and the additional standard deduction for State and local real property taxes.
In addition, Congress must decide whether to extend the Bush tax cuts for some or all taxpayers. These and other Bush-era tax rules expire at the end of this year. Without Congressional action, individuals will face higher tax rates on their income, including capital gains. Also, unless Congress changes the rules, the estate tax, which isn't in effect this year, will return next year with a 55% top rate.
In short, year-end planning—which always involves some educated guesswork—is a bigger challenge this year than in past years.
Traditional Strategy of Deferring Income Is Dicey This Year
Be careful when considering the time-honored strategy of deferring taxable income from this year into next year. The strategy makes sense if you’re confident you’ll be in the same or lower tax bracket next year, but the tax picture for 2011 is blurry. The top two rates have widely been expected to increase in 2011 from the current 33% and 35% to 36% and 39.6%, respectively—at least for taxpayers earning $250,000 or more ($200,000 or more if single). Therefore, such taxpayers might want to consider reversing the traditional strategy and accelerating income into 2010 to take advantage of this year’s presumably lower rates. You can also increase taxable income by postponing deductible business expenses such as office supplies and repairs and maintenance until next year. If you’re an employee of a family-owned business and it will pay you a bonus for this year, you might want to get it paid in 2010, rather than waiting for 2011.
The conventional wisdom also says that the existing 10%, 15%, 25%, and 28% rate brackets will be left in place for next year. However, Congress must take action for that to occur, and there is not a lot of time left. If Congress fails to act, the four lowest rates will automatically be replaced by three higher rates: 15%, 28%, and 31%. Therefore, individuals in the existing 10%, 15%, 25%, and 28% rate brackets should also be skeptical about following the traditional strategy of deferring income into next year. Again, the best course of action may be to start now to identify ways you could defer or accelerate some of your income between 2010 and 2011, but wait to pull the trigger until we know more. To defer income, you could do just the opposite of what we described earlier (e.g., wait to send invoices until late in the year so payments are received in 2011 and paying deductible business expenses this year). You might also consider setting up a retirement plan and/or making additional deductible retirement plan or IRA contributions for the year.
Click below to read parts 2 and 3 of this story: