Tax Tip--Take Your Money in 2010 (and pay tax on it!)

I know this is counter-intuitive:  take your taxable income in 2010, as much as you can, because taxes are rising. With the Bush tax cuts expiring this year, taxes go up.  By taking your money this year, you can pay tax at the lower rates.

Beginning in 2011 tax rates will go up and certain deductions and credits will go down for individuals. In 2013, married couples with income over $250,000 (singles, over $200,000) will pay an additional 0.9% on all income.

Then, if you are a "disqualified" professional with an S corporation( i.e., small business with three or fewer employees), under HR 4213 as currently written you will pay social security tax of 12.4% (up to the maximum) and Medicare tax of 2.9% on all income flowing from that corporation beginning in  2011  --you already pay income tax on that income.

What income can you accelerate to 2010? Consider:
1. exercising vested stock options with any gain in them,
2. not deferring any income to a future year whether through a formal plan with your employer or an informal arrangement by not billing until late in the year to put off collecting business income until early next year; collect everything you can this year,
3. cashing in on any gains sitting in your stock portfolio (that extra 0.9% tax discussed above? it applies to capital gains),

Also consider that certain tax deductions are expected to expire after 2010, and it's a good year to recognize income if you can also take those deductions. The deductions I'm talking about include:
1. Expensing capital acquisitions up to $250,000 (phase-out if acquisitions are above that)
2. Bonus depreciation of 50%
3. Itemized deductions limitations will go back to pre 2001 amounts
4. Child credit reverts to $500 from $1000 per child

This is definitely one area to go over carefully with your tax adviser and financial adviser, but it may benefit you to do the planning now.



Disclaimer: Tax Tips are informational only and are not meant as tax advice. Please consult with your personal tax adviser to see how these apply to your tax situation.