Welcome to the first in a series of discussions about why tax planning really shouldn’t be done one year at a time. After you read this series over the next few weeks, you’ll arrive at the same conclusion we learned years ago: tax planning is no longer a single-year exercise!

We had already recommended a multiyear strategy because the Alternative Minimum Tax [AMT] can sneak up on you, but we have even more reasons to consider it now. We need to be prepared for these three imminent events:

• The prospect of dozens of changes to individual income tax rules in 2011;
• The massive new healthcare bill already providing for tax increases to most taxpayers in 2013;
• And now working its way through Congress: an attempt at raising more revenue from some while limiting tax increases on others.

With all this taxing activity in the works, planning a multiyear strategy that moves income and deductions to the most advantageous tax year possible is a wise step.  Many taxpayers hope for a reprieve after the November elections, but getting a break will require a majority of the new Senate to halt debate on any new legislation, and the President still holds the power to veto for at least 30 more months. Essentially, the odds are against returning to the status quo.

Our first hurdle is the repeal of the “Bush tax cuts.” Actually, Congress needs to take no action to reset the tax rates to those of a decade ago. The changes are already baked into the cake of the current law. Plain and simple, the tax cuts are scheduled to expire on New Year’s Day 2011. These changes include:

• The return to the 20% long term capital gain rate (from 15% for all but the lowest brackets, which are currently zero)
• The elimination of the special 15% rate (0% for the lowest brackets) on qualified dividends
• Back to the regular rate for ordinary income
• The cap on ordinary tax rates will return to 39.6% from the present 35%
• Special relief for the increasing population affected by the AMT will end
• Itemized deductions will again be limited for those with over $250,000 in gross income

Also, the current situation of not having an estate tax will end with the return of the old law with its maximum 55% tax rate and $1 million exclusion. Even if you’re one of the “small people” that BP is concerned about, the feds will take back half of your $1,000 child credit. There’s more, but you get the picture. The good old days may not look so good when they return next year.

Check back next week for details of the tax increases passed with March’s health care bill. Until then, if you have any questions about multiyear tax planning, call 904-396-5400 to speak with one of our accounting professionals.

Filed under: Tax by Mark Patrick