Helps Resolve 2010 Year-End Tax Planning Confusion

Despite assurances of tax cut extensions by Congress, Americans should still hedge their bets until as late as possible

San Mateo, Calif. — November 30, 2010 — Despite recent assurances that Congress will reach a resolution on tax cuts, there remains much uncertainty regarding large parts of the 2010 tax code. Consumer money resource today advised individuals to begin preparing for the extension of tax cuts but to hold off on definitive action for as long as possible this year.

Many political and economic leaders have indicated that Congress will reach some agreement on the extension of Bush-era tax cuts this year. However, the specific cuts and final numbers are still open to negotiation. This makes it especially difficult for those who must make important decisions about investments, income and donations before the end of the year.

"The goal of tax planning is to maximize the money that stays in your wallet, but it’s more difficult this year than most because of the uncertainty surrounding critical tax breaks," said Ethan Ewing, president of "Ideally, Congress should make a final tax cut decision before its holiday break, giving individuals an even shorter window than usual to act on their tax planning strategies."

The One Sure Thing

Even with so much confusion around taxes, there is one sure bet this year for taxpayers. In 2010, individuals owning an IRA can convert it to a Roth IRA and report the income from that transaction over two years, lowering their up-front obligation. For those considering a conversion, the good news is they don’t have to wait on Congress. Regardless of tax cuts, this particular transaction can be amended next year to match the tax code. Specifically:

  • If the tax credits are extended, taxpayers can split the income over two years and reduce their lump sum payments.
  • If the tax credits are not extended, taxpayers can report the entire amount in 2010 and save money on taxes.
  • If the taxpayer finds that assets drop by a large amount in 2011, they can recharacterize the entire conversion back to an IRA before October 15, 2011.

"It’s the perfect mulligan," continued Mr. Ewing. "No matter what happens with the tax code or even the actual investment, you have options."

Strategies for Renewal of Tax Cuts

Most other tax decisions aren’t as simple. However, individuals can begin to plan some basic strategies for the expected tax cut extensions. In this case, a renewal means that taxes will remain the same for the immediate future. These conditions mean that taxpayers should pursue two basic strategies:

  1. Defer revenue to minimize taxable income for 2010. Push more income into the calendar year 2011 when it will be taxed at the same rate
    • Ask your employer to pay out bonuses in 2011 instead of 2010
    • Wait to sell stocks until 2011 to reduce capital gains exposure
    • Hold off on taking retirement distributions until 2011
    • Change over to a Roth IRA but split the reported income over two years to reduce your tax burden across two equally taxed periods of time
  2. Accelerate tax credits into 2010. This will provide more deductions on your current return, minimizing your exposure for this calendar year
    • Pay your property taxes in 2010
    • Make charitable donations before year’s end
    • Pay any outstanding medical bills in 2010
    • Increase your retirement contributions to a 401(k) or IRA
    • Sell off investments that have lost money now to take losses on 2010 returns

"Ideally, individuals can wait until a decision by Congress to make some of these moves," explained Mr. Ewing. "If not, it’s a bit of a gamble. If Congress does not renew the tax cuts, then individuals should turn this advice on its head and accelerate revenue while deferring tax credits."

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