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Year-End Tax Planning in July

Are You Prepared for Higher Taxes?

One way or another, taxes are going up in 2011.  When the Bush-era tax cuts were originally enacted in 2001 and 2003, they were designed to sunset at the end of 2010.

Most taxpayers put off their year-end tax planning until, well, year-end.  With the dramatic changes about to occur in less than six months, savvy taxpayers will start their planning now to take advantage of expiring tax breaks and get prepared for the increases.  In that spirit, below is a primer on what to be doing now:

Take one more look at your 2009 tax return.  Did you receive a huge refund or did you have to write a large check?  Either way, now may be the time to file a new W-4 with your employer to change the number of withholding allowances.  Increasing the number will likely reduce your refund next year, but will increase the net amount of your upcoming paychecks.  Decreasing that number will result in a smaller paycheck, but avoid an ugly surprise next April.  You can link to a tax withholding calculator in the Quick Links section above to play with the numbers.

Do you own any stocks, real estate or other assets that could be sold for a gain?  If so, selling this year could make a lot of sense.  Not only is the 15% tax rate for long-term capital gains going away after 2010 (rising to 20% in 2011), but so too the 0% tax rate applicable to taxpayers in the 10% and 15% tax brackets.

If you are an investor in dividend paying stocks, you have likely enjoyed and gotten used to the bargain 15% tax rate imposed on those dividends.  After 2010, those dividends revert to being taxed like any other item of ordinary income at rates that will top out at 39.6%.  You should be consulting now with your investment advisor to determine what changes may need to be made to your investment strategy to minimize the impact of taxes on your portfolio's rate of return.

With the onset of higher tax rates, investing in retirement accounts on a pre-tax basis will once again become popular.  If eligible, health savings accounts (HSAs) offer an opportunity to make tax deductible contributions and take out tax-free withdrawals for medical costs.  For 2010, the maximum contribution is $3,050 for an individual and $6,150 for a couple.  Folks over 55 can add an additional $1,000 to those limits.

If you've been thinking about installing insulation, energy-saving windows or making other "green" home improvements, now is the time to get started.  Through the end of this year, you can receive a 30% tax credit for those improvements to a maximum of $1,500.  If you already used some or all of this credit in 2009, you will be limited on what you can spend in 2010.  Next year, the credit rate drops to 10%.

Of course, all of these items are predicated on the current state of the law.  It is very likely that Congress will enact other tax changes during the balance of 2010, and we'll do our best to keep you informed of any major developments.  In the meantime, be sure to call us with any questions.

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