The budget cuts, debt ceiling, government shutdown debate over the past few weeks has done little to alleviate uncertainty. The political and ideological differences between the two parties will surely not be resolved in any meaningful compromise. This means that any significant budget and/or tax policy is going to be pushed down the road to the end of 2012. As Yogi Berra would say, “It’s déjà vu all over again.”
Tax planning usually centers on deferring taxes as long as possible. This has worked well over the past 30 years. Tax rates have generally gone down, and tax brackets have been indexed up with inflation. This strategy needs to be reversed for the next two years. The President has said repeatedly that he wants rates to go up for the upper income levels. Many tax increases from the Health Care Reform bill passed last year are scheduled to take effect in 2013. You will need a new tax strategy that takes advantage of the low rates we have now and moves deductions into the future. Tax rates may or may not go up in 2 years, but it is highly unlikely they will go lower.
Some of the strategies we will be looking at for clients are: 1) Capital gains harvesting. In the past we would harvest losses. In this environment you want to defer losses and realize gains. 2) Charitable IRA rollovers. This provision is only good for 2011. It is a valuable tool for those that qualify. 3) Roth Conversions. This is great way to move taxable income into the current year. You also get to wait until October 15th of the following year to undo the conversion if you find out you didn’t need it.
I know 2010 taxes are behind us, and income tax is probably the last thing you want to think about. But tax planning early could help you save big down the road. Don’t wait until it’s too late.