It may be five and a half months until your 2010 tax return is due, but there are a few things to consider now or at least before the end of the year that could impact your taxes going forward.
For example, the Bush tax cuts are scheduled to expire in the next two months if they're not extended and that means everyone will see a tax increase next year. Now, the Obama administration has been considering extending the Bush tax cuts permanently for those who earn less than $250,000. But the Republicans want them extended for everyone.
So where does that leave us? Basically, if the tax cuts do not get extended, you may want to consider how that change will affect several common investing situations.
If you're thinking about selling a stock, a business, or even a piece of investment real estate, the current long-term capital gains rate is 15 percent for investments held over twelve months. If the tax cuts expire, that rate goes to 20 percent. That means if you are lucky enough to have an investment with a $100,000 gain, your tax would go from $15,000 to $20,000.
If you're considering converting a traditional IRA or retirement account to a Roth IRA, the tax implications of this decision could be significant. Remember, all tax brackets are scheduled to increase to a higher tax liability. Many people have considered the Roth conversion principally because when converting in 2010, the investor can spread the tax liability over 2011 and 2012. However, if the Bush tax cuts are not extended, tax rates in those two years will be higher and paying the tax in 2010 would be more beneficial.
Finally, just being in a higher tax environment has an impact. This holds true for those exercising stock options or cashing in restricted stock. It is also important to consider when deciding to take money out of a qualified retirement plan as a distribution versus taking income from non-qualified taxable assets. The implications also extend to when and how to take deferred compensation income, as this can trigger a high income tax.
The point is, you only have two months to decide whether to take action based on the assumption that taxes will be higher on January 1.
