As you have probably heard by now, there are some pretty significant tax laws set to expire December 31st, 2010.  If Congress doesn’t pass new laws, the tax laws that were in effect at the beginning of the 2000’s will take effect again.  It is possible that Congress can pass laws effective January 1, 2011, or they could make them retroactive to the beginning of 2010.  Because of this, tax planning at the end of this year is particularly more challenging then years past.  This article is based on the current laws and may change substantially if Congress acts before year-end.  Below are some specific tax planning areas that you may want to consider:

Income tax – There are currently six income tax rates ranging from 10% – 35%.  Under current law, there will be five income tax rates in 2011 ranging from 15% – 39.6%.  Under the assumption that tax rates will be higher next year, it would be recommended to accelerate any income in 2010 that you can, so that you’re paying a lower tax rate.  You would also want to defer any potential deductions until 2011, since the higher tax rate may make the deductions more valuable.  The tricky part about this is that there is the potential for the 2010 tax rates to stay in effect for another year to help stimulate the economy.  Because of this, it is important to have a plan in place for both scenarios, and be ready to implement your plan at the end of the year.  You should also be careful about certain income tax breaks that expired at the end of 2009.  For instance, you could deduct sales tax in 2009, but not in 2010.

Estate tax – The federal estate tax was repealed for anyone that died in 2010.  It was believed throughout the year that Congress may retroactively enact an estate tax for this year, though that has become less likely as the year winds down.  It also helps that the Steinbrenner’s are ready to fight in court any retroactive estate tax since they saved approximately $300 million+ when George died earlier this year.  However, it’s highly likely that the estate tax will be back in 2011.  Under current law, the estate tax exemption is only $1 million, which means that anyone with an estate valued over $1 million dollars will be subject to the tax.  Some members of Congress have recommended increasing the exemption to $3.5 million, which is what it was in 2009.  Because this situation is expected to be cleared-up later this month or early in 2011, it will be important for you to determine if your estate plan needs to be updated at that time.  There are year-end income tax savings that can be taken advantage of through your estate plan.

Roth IRA conversion – The modified adjusted gross income (MAGI) limitations that typically apply to Roth IRA conversion eligibility have been removed for 2010.  Single taxpayers with a MAGI over $120,000, or married taxpayers filing jointly with MAGI over $176,000, will want to seriously consider taking advantage of this exception in 2010.  In addition, you should consider a Roth IRA conversion if you are under age 50, and your income is significantly lower this year than you expect it to be in the coming years.  Paying tax now on a Roth IRA conversion can provide for years of tax-free future growth.  The decision of whether to do a Roth IRA conversion should be made after discussing with your financial advisor as well as your CPA.

I have blocked out time in my schedule for the next month to meet with prospective clients about their year-end tax planning.  If you would like to review opportunities for tax savings and/or take advantage of a favorable capital gains situation with your investments, please contact me at 913.693.7918 or jchladek@chladekwealth.com to schedule your free consultation.

John P. Chladek, MBA, CFP® is the President and Founder of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals.  For more information, visit https://www.chladekwealth.com.

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