Uncertainty makes tax planning anyone’s guess

Associated Press

NEW YORK

The lack of action in Congress on the Bush-era tax cuts has turned routine year-end tax advice on its head.

Typically at this time of year, advisors offer up recommendations designed to reduce the taxes you’ll have to pay — or increase your refund — when you file your return.

But the lingering question about whether tax rates will go up in 2011 has made it more difficult to offer sound advice.

If tax rates were certain to rise, savvy individuals would want to make different moves than if rates stay where they are.

Congress heads back to work for a lame-duck session this week, with a long agenda and not much time left in the year.

The tax cuts are expected to be high on the to-do list, but the resolution of this thorny issue is still far from clear.

And the political shift that’s set to take place when control of the House of Representatives shifts to Republicans isn’t likely to help spur quick action.

“The election results create more uncertainty, rather than less,” said Matt Becker, a partner with the accounting and consulting firm BDO USA who is based in Grand Rapids, Mich. “I think the potential for gridlock is significant.”

If Congress does not act, personal-income tax rates will go up for most people.

The largest number of taxpayers will be hit by a hike in the 25 percent tax bracket for those who earn between $34,000 and $82,400.

Their rate would climb to 28 percent. The highest earners will see their rate climb from 35 percent to 39.6 percent.

However, tax brackets aren’t the only change that will come about if there’s no action in Washington. Katherine Pickering of H&R Block’s Tax Institute noted that a range of tax credits will be reduced or eliminated.

Among them: the child and dependent-care credit and the earned-income tax credit for low- and middle-income workers. The “marriage penalty” also will return, meaning married couples will generally pay higher taxes than if the spouses earned the same salaries but were single; and a host of personal exemptions and itemized deductions will phase out or be lost for higher-income earners.

Also, without new legislation, the alternative minimum tax could expand exponentially.

This complex rule is aimed at limiting deductions for high-income earners, and unless action is taken, tax bills could rise by $3,000 to $5,000 for as many as 25 million taxpayers, Pickering said.

Roughly 3.9 million taxpayers paid the AMT in 2009.

Although the planning may be harder this year, tax pros say the gridlock in Washington shouldn’t extend to your own house.

“People can get paralyzed and not do anything,” said Richard Kohan, a principal in the Price-WaterhouseCoopers personal financial services division. Kohan is advising his clients to set up strategies that allow for a few different outcomes and be ready to act before the end of the year, whether or not Congress does.

Where do you start?

First, get organized and spend a bit of time assessing your situation. You might want to adjust your tax withholding through the end of the year if you’re concerned you might owe taxes, for instance.

Then, review these guidelines and prepare yourself for when the timing of a resolution becomes clearer.

Defer Income

The usual advice: Where possible, defer income until next year, and put off paying taxes on those dollars. This most often applies to flexible income such as bonuses and commissions; or delaying invoices and collections for freelancers and consultants.

Potential pitfall: If your tax rate rises next year, you’ll pay a higher percentage of that deferred income to the government.

Best move now: “You may want to recognize more income this year,” said Scott Cheslowitz, a CPA at Rothenberg & Peters in Great Neck, N.Y. Because in the best-case scenario, your tax rate stays the same, and the worst case is the rate goes higher, consider whether it makes sense to record as much of your income as possible in 2010.