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Tax Planning
Time to break out the crystal ball and tarot cards

Break out the crystal ball, tarot cards, and astrology reports. Yes, we’ve reached the final days of 2010 and it’s time to consider tax strategy once again. For the third year in a row, we find ourselves scratching our heads wondering where tax policy is headed and how to arrange our affairs to account for it.

Why the uncertainty? This must be the first time in history a Presidential candidate has run on a campaign of ‘tax the rich’ and won. But even more bizarre is that the promised tax hikes haven’t fully materialized just yet. The tax hike pledge was widely expected to be implemented immediately following the 2008 elections, especially after those demanding the hikes took full control of Congress and the White House. After all, you want tax hikes to be as far away from the next election as possible so people will have forgotten, right? It’s a bit confusing to businesses and the capital markets to send signals of changing tax schemes and not knowing if or when it may happen, and even more so, leaving us to speculate on how bad the new rules may be.

Oddly, other than the significant hike in tobacco taxes, several miscellaneous direct and indirect taxes in the recent health care legislation, and a large number of tax hikes on generally big corporate and foreign transactions, the ‘tax the rich’ scheme is still being debated and the majority of us have otherwise been unaffected at the federal income tax level.

We also have a major reversal looming in estate tax policy. If nothing is done, we will go from a year with no federal estate tax (2010) to a full restoration of the estate tax with a $1 million individual exclusion amount for 2011 and beyond. Again, with the sunset clause of the original tax act coming down the pipeline, Congress has failed to act, resulting in only one certainty: if they do nothing, we know what will happen. Many have speculated that on both the income and estate tax issue, the departing Congress actually wouldn’t mind if these tax laws sunset, resulting in massive tax hikes, as it is the passive approach to arrive at their intended goal.

So we find ourselves with a newly elected Congress. As of submission deadline for this article, we’ve had a Presidential concession speech that contained strong hints of a willingness to concede the tax hike pledge for at least some period of time, though likely in exchange for some other political compromise(s). A bi-partisan majority of the newly elected Congress is calling for the extension of the existing tax rates for at least some period of time. Will the ‘lame duck’ session of Congress handle it, or will they sit on their hands and defer to the new Congress to do clean up?

So where does this leave you? First and foremost, don’t go it alone! Connect with a tax advisor that you feel has a finger on the pulse of what’s coming down the pipeline. I am closely watching the news out of D.C. and statements made by members of the incoming Congress to guide last minute year-end decisions. At this point, it does appear more likely than not that the current tax rates will be extended and the President will sign the legislation.

While many tax planning transactions such as stock sales can be done at the snap of your fingers, some transactions can’t be closed in 24 hours notice. If you have a large transaction that needs time to close before year-end, you don’t have the luxury of waiting to Dec. 3t to find out what Congress intends to do. You’ll need to use the best information available now and run with it.

Either way, consider utilizing some of the basic, routine year-end tax planning strategies. Here’s an example of some strategies you may find in this edition of the KPBJ:

• Take advantage of the zero percent capital gains tax rate this year — if your income falls into the lower tax brackets, you may be able to trigger some gains in your brokerage account and pay no tax on them.

• For large capital gain situations, take advantage of the ‘low’ 15 percent gains rate while it lasts. Caution — the Alternative Minimum Tax (AMT) may make the effective tax rate on the transaction higher than 15 percent, so careful calculations are needed to know what your actual tax result may be in such cases.

• If you think your tax rates may be going up, consider deferring deductible expenses into 2011. Same for charity — your deductions would be more valuable in the year in which you are in a higher tax bracket.

• If you expect your taxable income to drop next year such that you’re in a lower tax bracket, you might want to accelerate tax deductions into 2010.

• If you can control when you receive income such as an IRA distribution, consider which year will work out better to draw it. For businesses, you might ask clients to defer paying your invoices (or defer mailing them out) until after the first of the year if you need to defer income into next year.

With any luck, next year may be easier for planning!

(David Rhine is a CPA for Cox & Lucy CPAs, PS)

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