School has started and vacations are over, so that means it's time to start thinking about income taxes. But because Congress has not made tax laws for 2011 clear, planning is especially difficult this year.
The end of the year is the time to decide whether to make financial decisions before year-end or wait until the following year if a better tax break is available.
As it stands now, the Bush tax cuts are expiring this year, and we can look forward to higher tax brackets next year. The 10 percent bracket goes away and is combined with the 15 percent bracket, and the highest bracket of 35 percent goes to 39.6 percent. Also disappearing are low dividend rates and capital gain taxes move from 15 percent to 20 percent.
While this may provide a case for accelerating income into 2010 to pay at lower tax rates, it's still too early to decide. If Congress does make some last-minute changes to tax laws, some could see their taxes go down next year.
This uncertainty makes this year perhaps the most important to be working closely with a CPA and financial planner to analyze what decisions would be most tax-efficient by the end of the year.
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Tax laws we will certainly see in 2011 are those related to the new health care reform law passed this year. These laws will expand each year for the next five years, if the law isn't changed.
Starting next year, withdrawals from flexible spending accounts and health savings accounts will no longer be allowed on over-the-counter medicines. So participants in these plans may want to stock up in December on aspirin and other drugs to be able to use those funds. For those with health savings accounts, any withdrawal for these drugs or non-medical related items will be penalized by 20 percent instead of the current 10 percent.
For small business owners, buying equipment this year may be a wise tax decision. The IRS Section 179 deduction that allows businesses to deduct up to $250,000 in purchases in one year is being cut to just $25,000 in 2011. Also being cut are deductions and credits for tuition and teacher expenses. Some taxpayers will also see their tax deduction on student loan interest disappear.
We should expect more tax law changes, but until then the only way to know what taxes could be in the future is to visit www.MyTaxBurden.org. It allows you to type in your current income and expenses, then shows the potential taxes under four scenarios that could be possible for 2011 taxes.
