As we near the last quarter of the year, it should be time to start tax planning. But like most recent years, there is uncertainty. Tax credits and exemptions set to expire at year end, may or may not be extended. Most importantly, we don’t know for sure what the tax rates may be in 2011. In 2010, individual tax rates range from 10 to 35%. Currently for 2011, the 10% bracket is set to disappear and the highest rate goes to almost 40% because of expiring legislation.
Normally we try to accelerate expenses and defer income. But if the Bush tax cuts aren’t extended, the opposite may be true. Also, should you take capital gains in 2010 when the capital gains rates are 0-15%? Capital gain rates are also set to expire and return to 20% in 2011 unless Congress extends the lower rates.
Qualifying dividends will no longer be taxed at capital gain rates, but at the higher ordinary rates starting in 2011. Congress can also change these rules.
One thing for certain is that the suspension of required minimum distributions (RMDs) from retirement plans in 2009 have not been extended. And probably won’t be this late in the game. So seniors and others with RMDs must take distributions in 2010 or be subject to penalties. Of course, you can also avoid the RMD rules by converting your retirement funds to a Roth IRA. Then you still have to be concerned about what the tax rates will be in the future. Tax on Roth conversions can be paid in 2010 or deferred to 2011 and 2012.
So as we wait to see what, if anything, Washington will do, do we use a crystal ball for tax and financial planning? The Tax Foundation has a calculator on its website that uses four different scenarios to see how you may fair: one with Bush cuts expired, one with cuts extended and others with Democrat proposals. I suggest waiting to see if we get some clarity, but don’t blow it off completely! You should not leave your tax and financial planning to chance.
