Bush Tax Cuts, Congress and Smart Investment Tax Planning

The Huffington Post is reporting that the White House is likely to give in and allow the extension of the full Bush-era tax cuts.  But until the divided Congress acts on the pending expiration of the 2001 and 2003 Bush tax cuts, tax planning will involve some guess work this year.

Justin Ransome has a piece up at www. onwallstreet.com about “10 Year-End Tax Tips”.

Ransome, a partner in Grant Thornton’s Washington National Tax Office, notes that if there is no Congressional action, tax rates will rise to as high as 39.6% on ordinary income and 20% on capital gains next year. “…Acting before knowing what Congress will do renders some planning a crapshoot,” Ransome writes. “It may be prudent to prepare your strategies now, but wait to see what lawmakers do.”

One thing that makes the list is considering selling assets now if you think your capital gains rate will increase in 2011, in order to take advantage of currently low rates.

“Stock and other securities can be sold and bought back immediately allowing the payment of tax without changing position. This gives you an increased basis in the asset for future sale but it may make more sense to take advantage of today’s low rates to diversify a concentrated position.”

(The wash sale rule, which prohibits getting a tax benefit if you immediately turn around and buy what you just sold, only applies to sales of losing investments.)

This could also be a good time to rebalance your portfolio, especially, Ransome writes, if an excessive chunk of it is tied up in one stock or asset “because you’re deferring the tax bill on a large gain.”

He warns that this isn’t as obvious a decision as it seems — “the time value of money still often makes deferral a better strategy” but “keep in mind that rates only have one way to go from here.”

A recent piece in the Wall Street Journal also doped out some of this but made the added point that dividends would be strongly affected by an expiration in the tax cuts as well. Columnist Laura Saunders explains:

  • “Expiration of the Bush cuts would significantly raise taxes on them by again classifying them as ordinary income. For a couple with about $58,000 of taxable income, the dividend rate would jump to 28% from zero.
  • “Assuming that doesn’t happen… there would be a zero rate [on dividends] up to about $70,000 for joint filers.
  • “Above that, the Bush plan maintains a 15% rate for all, while the Obama plan gives a 15% rate only to those with taxable income between about $70,000 and $235,000, and jumps to 20% above that.”

One thought on “Bush Tax Cuts, Congress and Smart Investment Tax Planning

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