The following is a guest post from Karen at BackTaxesHelp.com.
While one normally wouldn’t equate the infamous “read my lips” statement with the word “hike,” it could be more relevant than you think.
From Bush Sr. to Jr., America has enjoyed relaxed taxing rules for some time. However, the last Bush tax cuts, an infamous set of rules that took effect during Bush Jr.’s time in office, could be coming to see their last days. Why? With the new year, besides champagne and confetti, also comes and change.
What’s that got to do with taxes? Well, this year, starting January 1, 2011, America could see a great change in the taxing system and the corresponding cuts that they have lived under for some time. And this resolution may not be for the better, as it could mean higher personal income tax rates and capital gains rates, to name a few, for many people. Not to mention, the tax changes could also set off a slur of new state taxes, some of which we have already begun to see- tan and cigarette sin taxes, anyone?
While everything could change in an instant (well, maybe because we’re dealing with the government and politics, a little longer than an instant), it’s still important to consider all future scenarios. Let’s take a look at how prospective tax hikes could affect you and some of the ways that you might deal with them.
The Prediction: Increased income taxes. Personal income taxes are set to return back to their old amounts. The most affected by this will be the highest and lowest brackets, rising from 35% to 39.4% and 10% to 15%, respectively.
- The Prognosis: Move to another state. While we don’t suggest quitting your job, you can leave something else- your home location. Pick up and go. Alright, we understand it’s not that simple, but literally getting out of town could be your best solution to offsetting a personal income tax hike. Especially if you are flexible with regards to your job and can move and have minor changes to income level (all those who are self-employed, this particularly means you!) There remain nine states, including Florida, Texas, and Washington, that have no state income tax. Considering a move to California, Indiana, Mississippi, New Jersey, Rhode Island, or Tennessee? Don’t. Or, not so fast, as all states have an income tax of 7% or more.
- Or, Move to another city. Taking a big move not your cup of tea? How about a less dramatic relocation, then? Even moving from your current city to a bordering one could mean huge savings. What kind of savings? Property tax savings. And, while property taxes may not appear to fluctuate as much as state income taxes, they could still prove crucial to saving you tax dollars, and maybe even scoring you a bigger and better house.
The Prediction: Higher taxes for married couples. The double deduction that was previously loved by married couples is set to expire.
- The Prognosis: Reconsider Marriage. Simply filing taxes as a married couple could mean hundreds of dollars in increased tax filings. We aren’t tell you to go out and break up with your loved one, but if you were considering marriage for a pure tax advantage, reconsider.
The Prediction: Reinstated death tax. The death, or estate tax, will be restored as of 2011. So, a top tax of nearly 60% could be levied on estates worth a million or more dollars.
- The Prognosis: Die. Ok, kidding. But dying this year could save you and your heirs a large chunk of change if the estate tax is restored- just look at the Steinbrenner death as an example.
The Prediction: Increase in capital gains tax. The capital gain tax rate will go from 15% to 20%.
- The Prognosis: Sell your stocks. If you’re contemplating selling off some of your long term stocks, use this as your extra push to act now and take advantage of the lower rate. Think of it this way, if you have already gained a lot, why not sell now and pay 5% less in taxes, especially if you have already got a hunch about selling.
The Prediction: Child tax credit halved. The current child tax credit of $1,000 will be cut in half to $500.
- The Prognosis: Buy drugs. Ok, hear us out. Now, while you can’t go out and abandon your children, you can take some proactive measures to lessen the burden of the reduced credit. This means taking full advantage of the present taxing climate. One thing you can do? Go out and buy drugs. Over the counter drugs, like Advil and Excedrin, to be exact. All of the over the counter drugs that you or your children use for that minor headache or stomach pain could see a huge spike in cost with future tax rates. Why? A tax increase of up to 40% is predicted for the meds as money available through such financing divisions as Health Savings Account and Health Reimbursement Account will no longer be guaranteed for over the counter drugs that are not used in correspondence with prescription drugs.
The Prediction: Conversion rules to expire. The conversion rules surrounding transferring from traditional IRAs to Roth may go away. This means that the income and filing status requirements that have been eliminated may be reinstated.
- The Prognosis: Convert to Roth IRA. It’s important to take advantage of the current laws with respect to your retirement plan. If you convert to a Roth now or before 2011, you won’t have to deal with income limit conversion rules, saving you a lot of hassle and money.
The aforementioned actions are just a few ways to deal with predicted tax hikes. Hopefully we can stop there, and see tax cuts, rather than hikes, come into play for the New Year. Politicians including House Democratic Leader Steny Hoyer have even been quoted claiming that tax cuts could actually be extended for the upcoming year, so, who knows.
All we’re saying is that it is important to be aware and ready for what may come. In the meantime, rather than focusing on reactive measures, perhaps take some proactive steps to fight tax hikes. Vote for the politicians who you feel give you the best tax relief plan, write a letter to the local paper, or hey, even write a letter to Congress.
This guest post was provided by BackTaxesHelp.com, a web destination that provides taxpayers information on resolving various tax problems through trusted tax solutions. Visit their site to find more advice on tax settlements, installment agreements, filing back tax returns, and other tax relief solutions.