As
the
tax
year
end
approaches,
the
smart
thing
to
do
is
minimize
taxable
income
by
stalling
income
and
accelerating
expenses,
right?
Maybe
not
--
at
least
for
awhile.
This
axiomatic,
ingrained
belief
among
business
owners
may
cost
you
a
lot
of
money
if
you
stick
with
it
for
the
next
couple
of
years.
It
came
up
today
in
a
Chief
Executive
Boards
International
meeting,
stated
as
if
it
was
a
physical
law
of
the
universe.
It's
not.
Don't
delay
--
you
have
4
months
left
to
make
some
major
changes
in
your
year-end
tax
strategies,
and
they
may
need
to
be
completely
revamped
from
what
you're
used
to.
Why? The game has changed. Let's examine the assumptions -- that we're going to have to pay tax on the income sometime, and later is better than sooner, since we get to hold onto the cash and keep it earning interest for us. Embedded in that assumption is that the tax rate later is the same as the tax rate sooner, right?
The changed game is that you're probably not earning meaningful interest on the deferred taxes, and also that the tax rate you will be paying in the future is going to be higher than this year's tax rate. Further, if your 2010 income is likely to be soft, you may have the further advantage of being able to accelerate income into an even lower marginal bracket this year, as well.
The fact is that on ordinary income the highest federal bracket will go up from 35% this year to 40.8% next year, including the effect of some lost itemized deductions. In 2013, left unchanged, the maximum rate on "unearned" income like dividends and interest goes to a stunning 44.6%. As far as capital gains are concerned, this year's 15% rate goes to 21.2% next year, and since you'll be patriotically helping to pay for the health care of the nation (whether you want to or not), to 25% for 2013.
So, what's the better plan? For most taxpayers, it's the reverse of decades of conventional wisdom. Accelerate income. Stall expenses and deductions. For every dollar of taxable income you move into this year, you have a "window" into which you can accelerate 2012 income into 2011 for some of the same benefits.
This also might be a good year to convert some of your tax-deferred IRA investment into a Roth 401(k). Pay the income tax now at rates lower than we're likely to see for awhile and your future gains become tax-free for life. See: "Roth IRA Conversions -- Potentially Great Opportunity for 2010" for more details.
Why? The game has changed. Let's examine the assumptions -- that we're going to have to pay tax on the income sometime, and later is better than sooner, since we get to hold onto the cash and keep it earning interest for us. Embedded in that assumption is that the tax rate later is the same as the tax rate sooner, right?
The changed game is that you're probably not earning meaningful interest on the deferred taxes, and also that the tax rate you will be paying in the future is going to be higher than this year's tax rate. Further, if your 2010 income is likely to be soft, you may have the further advantage of being able to accelerate income into an even lower marginal bracket this year, as well.
The fact is that on ordinary income the highest federal bracket will go up from 35% this year to 40.8% next year, including the effect of some lost itemized deductions. In 2013, left unchanged, the maximum rate on "unearned" income like dividends and interest goes to a stunning 44.6%. As far as capital gains are concerned, this year's 15% rate goes to 21.2% next year, and since you'll be patriotically helping to pay for the health care of the nation (whether you want to or not), to 25% for 2013.
So, what's the better plan? For most taxpayers, it's the reverse of decades of conventional wisdom. Accelerate income. Stall expenses and deductions. For every dollar of taxable income you move into this year, you have a "window" into which you can accelerate 2012 income into 2011 for some of the same benefits.
This also might be a good year to convert some of your tax-deferred IRA investment into a Roth 401(k). Pay the income tax now at rates lower than we're likely to see for awhile and your future gains become tax-free for life. See: "Roth IRA Conversions -- Potentially Great Opportunity for 2010" for more details.
