Congress leaves income tax planning in limbo

Chicago Tribune

Normally, at this time of year taxpayers would be busy following tried and true ways to cut their taxes before the year ends.

They’d be trying to solidify as many deductions as possible while also trying to push some income, such as bonuses, into the following year.

But this is no normal year, because the nation’s tax rates are in limbo. Tax reductions enacted in 2001 and 2003 will end this year if Congress doesn’t act before Jan. 1. And in that case, taxes will go up on every taxpayer.

Political leaders have been sending mixed messages about intentions. Some claim they will make sure they renew the so-called Bush cuts before the end of the year so the middle class doesn’t face higher taxes next year. Others say higher-income people can live without tax cuts, and still others say all Americans need to keep tax cuts while the economy heals.

Regardless of their positions, taxes will remain in limbo until Congress makes a move. Financial advisers expect some type of action by Congress after the November elections but say it could come so late in the year that taxpayers will have little time to plan their best moves in the few days remaining before 2010 ends.

Rather than acting now on a guess, Mark Nash, a financial planner and certified public accountant with PricewaterhouseCoopers, suggests clients establish contingency plans so they can adjust fast to whatever occurs. “Make plans, but don’t pull the trigger until we see what Congress does after the election,” he said.

While few expect middle-income clients to face higher taxes next year, advisers say people with incomes over $200,000 and couples with incomes over $250,000 need to be ready to protect themselves from higher taxes in 2011 if Congress moves in that direction.

Under measures discussed by President Barack Obama, people in today’s 33 percent tax rate could see their tax rate climb to 36 percent, and the current 35 percent rate would jump to 39.6 percent. Also, capital-gains taxes could rise from 15 percent to 20 percent, and the zero-percent capital-gains rate for low-income taxpayers could disappear. High-income people could end up with dividends taxed at as high as 39.6 percent.

If Congress decides this year to increase taxes on the affluent in 2011, then the normal practice of moving income from 2010 to 2011 could be a mistake. Also, deductions might be more helpful in 2011 than 2010. So basic contingency plans would involve delaying deductions and taking income this year rather than next.

For example, if you were going to provide a large contribution to a charitable organization, you might wait and do it after Jan. 1, when it might reduce a higher tax bill than this year’s. Likewise, if you have a business, and typically wait until the end of the year to bill a client, you might send out the bill now and hound the client to pay before the end of December. That way you can pay taxes at this year’s lower rates to avoid higher rates in 2011.

Keep in mind, however, where you stand on income. Financial advisers are still telling middle-income people, who are not likely to have a tax increase next year, to think about cutting taxes this year with these typical steps.