Because of the paralysis over universal health care plans in the nation’s capital right now, our elected officals are not even currently trying to resolve tax legislation. So, the most likely outcome is that sometime before the end of the year, Congress will enact a one or two year extension of the current (2009) rates and exemptions to push it down the road a bit until a more permanent solution can be debated. Democrats, particularly from farm states, do not want to vote for anything short of full elimination of the tax close to an election. So, I expect that no permanent solution will be enacted until after November of 2010.
What to do now? Here are some thoughts to keep in mind when tax planning for 2009.
- Single individuals with taxable income over $190,000 and married couples with taxable income over $230,000. These individuals are likely to pay more tax and have each additional dollar of income taxed at the new 36% or 39.6% rate. Remember that taxable income is what’s left after all deductions. This means that gross income could be considerably higher than these amounts.
- High-income individuals with numerous itemized deductions. The most common of these are mortgage interest, charitable contributions, and state income tax. Starting in 2011, these deductions will be worth only 28%, down from the current 35% or 33%.
- High-income individuals with unrealized capital gains. Starting in 2011, gains will be taxed at 20%, up from the current 15%. Ditto for qualifying dividends.
- Individuals subject to the AMT. Other than the annual patch, the AMT is not likely to be affected. Individuals who are subject to the AMT will not be affected by changes to the regular tax rules.
Since the administration is not proposing to accelerate the sunset of the current tax rates before 2011, now is the time to consider planning. This year and next year could be the lowest tax years ever for some high-income individuals. You may want to consider some of the following: (We urge individuals to discuss these ideas with their tax advisors)
- Accelerate income. Individuals who have the ability to pay himself more income, including self-employed and IRA holders over 59 1/2, may want to take more income in 2009 and 2010 before taxes potentially go up in 2011. This may include converting to a Roth IRA and paying the taxes in one year instead of spreading them out over 2011 and 2012, as allowed by the new law.
- Take capital gains. Anyone sitting on appreciated assets may want to think about selling them in 2009 or 2010 while the capital gains tax is still 15%.
- Accelerate deductions. In 2009 and 2010, deductions will still be worth 33% or 35% to high tax bracket s. this deduction goes down to 25% in 2011. Individuals may want to accelerate charitable contributions or pay down their mortgage while they can still get a bigger deduction.
- Start repositioning assets. If you are an individual that may be subject to higher tax rates in 2011, you may want to consider more tax-advantaged investments such as municipal bonds and tax-managed funds.
Individuals making less than $200,000 and married couples making less than $250,000 before taking the adjustments for the standard deduction and personal exemption, would not be affected by the current administration’s proposals. What will affect us all are the rising taxes on everything from state income taxes, sales taxes, gasoline, cigarettes, beer ,wine, sodas, and so on. These types of taxes need to managed in a different way. These may be lifestyle changes and budget issues. It won’t be long before Congress takes a look at taxes so keep an eye on the news.
