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Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Wednesday, January 13, 2010

2010 May Be a Taxing Year

As we begin the New Year, our thoughts turn to the preparation of our tax returns. We ask ourselves: “I wonder if I will get a refund this year?”, or “How much am I going to owe the IRS?” Every year it seems more difficult to prepare our returns. Thank goodness we have software programs like Turbo-Tax® and accounting professionals to help us. Every time Congress tries to tweak the economy by changing the tax code, they add more complexity to an already complex task.

To make matters worse, according to a recent article in the Wall Street Journal, we can look forward to “some 70 new taxes on the middle class and small businesses” that went into effect with the New Year, in some cases “thanks to Congress’s failure to prevent the expiration of popular and economically vital tax breaks on time.” (The New Year Brings Tax Chaos by Stephen Moore, January 8, 2010)

Most notable, perhaps are the alternative minimum tax (AMT) and the estate tax. According to Mr. Moore, some 25 million middle class American families with incomes as low as $75,000, could get hit with the AMT. Mr. Moore further points out that the AMT was originally designed to hit only the richest 100 Americans.

The estate tax expired, effective January 1st, making 2010 a good year to die, if you have a large estate. Previous changes to the estate tax that increased the estate tax exemption to $3.5 million per person in 2009, called for the complete elimination of the estate tax in 2010. However, if Congress does nothing this year, the estate tax will be reinstated at a 55% rate in 2011.

Members of Congress have indicated that they will reinstate the estate tax and possibly address the other tax changes retroactively to January 1st. Unfortunately, it makes it very difficult for tax and estate planning professionals to help their clients effectively do tax planning. In a few somewhat extreme cases, seniors even changed their living wills in 2009 to allow their heirs to extend their life into 2010, if necessary, to take advantage of the situation.

Other changes for 2010 include the expiration of the new homebuyer tax credit, the elimination of the deduction for state sales tax and local taxes, tax deduction for college tuition, and the research tax credit for businesses, to name a few.

With spending by Congress at record levels, the focus will turn to lowering the deficit. While one would hope Congress will work hard to reduce spending, it seems likely that we will see numerous increases in taxes along with more complexity and more uncertainty in 2010 and beyond.


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