To say that 2010 and 2011 are going to be ‘unique’ tax years would be quite an understatement. With all of the changes, or potential changes, heading our way, I thought it would be timely to discuss what some of these changes are and how they may potentially affect you and your family.
One of the most publicized recent tax changes came in the new health care bill pertaining to 1099 tax forms. According to the new law, “beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year”. If you think through the logistics of this, it is quite easy to see how much of an additional burden this will put on small business as well as the Internal Revenue Service. As you listen, I will explain some of the details of this change, what some of the un-intended consequences may be, and what actions can possibly be taken to mitigate this additional reporting burden.
We go on in the show to explain some other tax changes that could potentially affect you:
- Traditional Strategies for Deferring Income – In 2011, the two top marginal tax rates, 33% and 35%, are scheduled to increase to 36% and 39.6%, respectively. If no action is taken by Congress, the four lowest rates, 10%, 15%, 25%, and 28%, will be replaced with the 15%, 28% and 31% brackets. If this is the case, it may make sense to recognize more of your income in 2010 to take advantage of the currently lower rates.
- Higher-Income Individuals May Benefit from Accelerating Itemized Deductions – In 2010, the phase-out rule that reduces some itemized deductions is gone. It is scheduled to come back, however, in 2011. If that happens, this rule will wipe out $3 of deductions for every $100 of AGI (Adjusted Gross Income) above the applicable threshold. As you can imagine, top earners could potentially see a large majority of their itemized deductions wiped out. Depending on your AGI, it may be more beneficial to accelerate some of your 2011 deductible items (mortgage interest, state and local tax payments, and charitable donations) into 2010.
- Time Investment Gains and Losses – Long-term capital gains rates are increasing in 2010 from 15% to 20%. It may make sense to recognize gains in your taxable investments in 2010, take advantage of the lower rates, reset your cost basis, and hopefully have carry-forward losses from 2008 and 2009 to offset the resulting taxes.
- Claim New Insurance Tax Credit for Small Employers – Qualifying small employers can claim a new tax credit that could potentially cover up to 35% of the cost of providing health insurance coverage to employees.
- Big Section 179 Deduction – In 2011, the maximum deduction for accelerated depreciation on new and used equipment and software additions will drop from the current $250,000 to $25,000. If you are planning on purchasing any new equipment for your business, you may want to do so in 201o in order to take advantage of the much larger deduction
- Social Security Tax Exemption for Wages Paid to New Hires – Wages paid to a qualified new employee between 03/19/2010 and 12/31/2010 are exempt from the employer’s portion of the Social Security tax (6.2% of wages up to $106,800).
- Tax Credit for Retaining New Hires – Above and beyond the Social Security tax exemption, employers can also claim a new tax credit up to $1,000 for wages paid to each qualified new employee (defined as: 1) started between 02/03/2010 and 12/31/2010 and 2) were not employed more than 40 hours during the 60-day period ending on the start date.
To close out the show, I share a Consumer Reports Money Adivser article titled “Money mistakes to avoid: 9 lessons to take away from the market’s ups and downs”. As you listen, I will touch on each of these 9 mistakes:
- Following the herd
- Running for safety
- Making unrealistic return projections
- Overpaying for past performance
- Not focusing on when you’ll need your money
- Putting too much faith in your broker
- Counting on your home as an investment
- Not harvesting losses (or taking gains)
- Being overconfident