Tax planning for 2010 remains uncertain

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With the tax cuts enacted in 2001 and 2003 expiring at the end of 2010, many critical decisions remain up in the air. Congress has moved slowly on tax law in recent years but this year, watching paint dry or metal rust would seem speedy by comparison.

The trouble with Congress taking its time in acting on next year’s tax rates is that it makes tax planning pretty much impossible. For instance, how can a paid tax preparer advise his or her client to take capital gains this year because the rate will be better than it will be next year if he has no idea what it will be next year? Congress will not, in all likelihood, act until late in the year – possibly as late as after the November elections.

The conventional wisdom is that at the very least the reduced tax rates for those earning under $250k/$200k (married/single) will remain in place. This means that the 10 percent bracket, which was created by the tax cuts, should also remain in place, ruling out the possibility that the first rung on the ladder will move to 15 percent. Also, the capital gains and dividends rates for those in the under $250k/$200k buckets should remain at the current 15 percent rates. But, there are no guarantees.

Another important tax issue that remains in limbo is the estate tax. Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) are attempting to amend the small business bill with an estate tax proposal addressing the uncertainty caused by the 2010 expiration of the tax and its subsequent reversion to pre-2001 levels. Under their plan, the estate tax rate would be set permanently at 35 percent, with an exemption for estates of under $5 million (indexed for inflation). In a change from previous Lincoln/Kyl approaches, the current proposal phases in (over 10 years) the $5 million exemption amount (a move that lowers its 10-year cost).

Also of note, the proposal would allow the estates of 2010 decedents to choose between the estate tax currently in place and the one that Sens. Lincoln and Kyl propose. No one knows exactly how the dust will settle on the estate tax, but most experts agree that it is unlikely that there will be a return to the $1 million exemption and 55 percent rate.

So, how does a taxpayer make good choices when it comes to planning for a year in which so much remains uncertain? Because most taxpayers and tax professionals don’t own a reliable crystal ball, the National Association of Enrolled Agents (NAEA) continues to endorse a more stable tax code that provides taxpayers the information they need to decrease their tax burden when (not after) they need it. Taxpayers are encouraged to contact their Congressional representatives to express their support for a stable tax code.


About The National Association of Enrolled Agents:

TheNAEA is the professional society representing tax preparers who have earned the distinction of Enrolled Agent (EA). EAs are federally licensed to represent taxpayers before the IRS for audits, collections, and appeals. NAEA supports its nearly 12,000 members with resources, education, and networking and by representing their interests to government, business, and the general public. Members are alerted to the latest changes to the tax code and federal regulations through a weekly e-newsletter, and NAEA PAC supports the interests of EAs in legislative matters.

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