Tax Cuts Extended…Now What?

We’ve been watching the debates for months, and now, for the next two years, the Bush-era tax cuts will remain in effect. President Obama’s push to rescind the expiration of the cuts for those making less than $200,000 (single) and $250,000 (married, filing joint) went by the wayside.

For those of you poised at the starting line of tax planning, the gun has gone off and you little time to deploy a final 2010 tax plan.

Conventional tax planning wisdom holds true for 2010:

  1. Don’t bother getting a job. You get another 13 months of unemployment.
  2. No need to sell appreciated stock. The long-term capital gains rate of 15% will apply to stock sales through 2012. But keep your ears open during 2011. Congress loves to change tax law every 15 minutes.
  3. Have more kids. The Child Tax Credit and Earned Income Tax Credit remain in full effect.
  4. Continue to throw down for your kids’ college tuition. The American Opportunity Tax Credit was previously expanded to include purchases of computer equipment, books and supplies. Of course, if you can afford to send your kids to college, you probably don’t qualify for the credit. You must make less than $80,000 per year (single, head of household) or $160,000 per year (married, filing joint).
  5.  Enjoy that extra $10 you’ll get from your take-home pay. The Social Security Tax rate on your withholding has been decreased from 6.2% to 4.2%. Make sure you stimulate the economy by spending that extra money on artichokes, video games and tickets to Disneyland. After all, if you hoard it in a savings account, you will cause the downfall of this great nation.
  6. If you’re a school teacher, you will still be allowed to write off $250 of purchases of school supplies. I know you likely spend hundreds more out of your pittance of a salary, but thank goodness you don’t care about material things. You only care about the children; and a daily diet of Cheerios and Top Ramen is not an issue for you.
  7. Die before Dec.31, there is no estate tax for 2010. Beginning in 2011 estates valued at more than $5 million will be taxed at 35%.
  8. If you don’t itemize deductions, you won’t be able to write off your property taxes, which Sen. Max Baucus (D-MT) tried to include in this package.
  9. All jazzed about the “going green” tax credits on solar and energy saving appliances?  Do it now, and put those items in service (not just paid for by Dec. 31) to maximize the credit. Buried in the legislation is a hatchet job on these credits for 2011 and beyond. The maximum credits have been drastically reduced.
  10. Another Band-Aid on the Alternative Minimum Tax for two years should help a few million Americans reduce their tax bills.
  11. And of course the conventional wisdom – defer income to 2011, pay bills for deductible expenses before Dec. 31. If you own a business, spend a ton of money on equipment and vehicles before year end to take advantage of the Section 179 deduction and bonus depreciation.

You may want to head over to your tax pro to customize these changes for your individual situation.  Your tax pro can explain and apply all the convoluted formulas to determine your liability and suggest ways to decrease it.

And how about a nice round of applause for Congress for going all “bipartisan” to make this happen? C’mon now. I can’t hear you…

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Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know,” available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook