Most folks don’t think much about taxes until around April when they start to ponder what kind of damage the IRS will inflict on them for the prior year. We encourage, beg and cajole our clients to be proactive about taxes, and in so doing we can minimize the damage and also help plan for it. Alas, some folks are just hardwired to procrastinate when it comes to this issue and do little, if any, advance prep for April 15th.
However, this year advance prep will be important. In 2011, ordinary tax rates will be going up for most folks. Capital Gains tax rates will be going up for everyone. This means that the dollar you earn in 2010 will be taxed less than the same dollar earned in 2011, particularly for capital gains. If you have the ability to accelerate taxable income this year, or put off paying tax deductible bills until 2011, you may well be making a 3-5% spread by doing so. That’s a pretty good return in today’s world, and it can be had by almost anyone with a little advance planning. Doing something as simple as not paying your second property tax installment, or perhaps your state estimated tax payments, until 2011 could make you money.
In 2010 anyone can convert an existing IRA to a Roth. This could be a great time to do that if your income is low this year due to the economy or a layoff, and you are in a lower tax bracket. A Roth IRA that does not create tax when drawn out can be a nice thing to have in retirement. In 2011 and beyond tax rates will be higher and a conversion may not make sense under those circumstances.
Since capital gains rates are increasing from 15% in 2010 to 20% in 2011, or if you are in the lowest tax brackets from 0% (that’s no tax for you recent college grads) in 2010 to 10%, if you’ve got something to sell at a gain, this year just might be the time to do it. However, if you have investments to sell at a loss, you may be better off selling them next year when it will offset tax at higher rates.
All this boils down to a bit of advanced planning and calculation, and you will hear me beat this drum louder when we get closer to the end of the year.