Tax rates are almost certainly going to go up in 2011, though maybe not for everyone. The law currently on the books will enact an effective tax increase for all income levels when the Bush tax cuts sunset on New Year’s Eve. Congress and the White House have said they want to preserve the tax cuts for the brackets below $250,000.
In any case, common wisdom would suggest that Americans expecting a tax increase next year should try to accelerate their income, pushing more into 2010, to take advantage of lower tax rates. In some situations this will be the best course of action—but it will not always be best. Many Americans, even if their taxes are likely to go up in 2011, may be better served delaying their income, lowering their 2010 adjusted gross income (AGI).
Many tax breaks have phase out thresholds. The tax credit awarded for dependant children, for example, gradually lessens in value as income increases, eventually disappearing entirely. Delaying your 2010 income into 2011 will lower your AGI and thus make you more eligible for various tax breaks. For many Americans this may be a highly desirable outcome, even if they will face higher tax rates in 2011. The child tax credit, for example, only applies to children under the age of 17. So if you have child who is going to turn 17 next year, it will likely be beneficial to maximize this year’s tax credit.
Everyone’s tax situation is unique and blanket statements will not apply to everyone. Still, it remains true for many Americans that the best course of action to take in their end of the year tax planning is to delay income, reduce their AGI, and increase their eligibility for 2010 tax breaks. This is not true for everybody, of course. The only way to determine your best option is to perform comparative calculations with the help of a tax professional.
To figure out which tax options are best for you, or for help with other tax issues, contact the Illinois tax attorneys at Horowitz & Weinstein.