How to Plan when the Future of Tax Rates is Uncertain

It’s October and the fate of the Bush tax cuts is still uncertain. Due to the Midterm Elections, the vote regarding the tax cuts has been placed on the back burner, which makes year-end tax planning nearly impossible. If Congress does not vote to extend the tax cuts, rates for the high income brackets would return to the rates in 2001. The 33% bracket would rise to the 36% and 35% would rise to 39.6%. The 10% bracket would be eliminated completely. Some pundits are predicting that Congress will extend the Bush tax cuts for another two years. However, there is a chance that a filibuster could thwart any tax changes and the tax cuts might expire for everyone. With all that said, you are probably asking, “So how am I supposed to plan?”

In order to approach the unknown future of the tax cuts, you do not have to plan three different strategies (Pre-Bush tax cuts, status quo, and Obama’s Proposals). There are ways to approach this conundrum efficiently and economically.

· Accelerate income into 2010. This approach does seem contrary to conventional wisdom, but due to the uncertain climate, you will benefit at the lower tax rates.

· Consider selling open unrealized-gain positions. If you accelerate a gain transaction on an asset you believe to have strong market-value, you will avoid future taxation on the increased basis and will qualify for a lower tax rate.

· Wait. If you wait to play it safe, look for strategies that can be reclassified after year-end.

· Roth IRA Conversions. As of 2010, all taxpayers may convert their retirement plans to a ROTH IRA. You can take the Roth converted amounts into 2010 income or defer it to 2011 and 2012. Additionally, if you feel the Roth IRA does not suit you, you do have a second chance and can undo the Roth conversion until October 15, 2011, which is unprecedented. However, in order to qualify for this tax break, you must convert before year-end. The decision to convert to a Roth IRA is complex so contact us if you need assistance.

It may seem concerning to you to base your tax planning around speculation. However, there are strategies to approach this very unusual year-end situation. Contact our office today to schedule appointments regarding your tax projections.