Did you say Accelerate my Income? PART I: By Carolyn Flaherty

Historically the theme of taxation is defer, defer, defer. After all one in the hand is worth two in the bush so the saying goes. So why might your financial advisors be encouraging you to accelerate income in 2012?

Remember all those Bush-era tax cuts put in place back in 2001 and 2003? The cuts impacted individual, capital gains, and dividend and estate tax rates and made an additional thirty plus tax savings changes to the Tax Code. All those provisions are set to expire at the end of 2012.

The loss of these savings will not only impact the wealthy. On the contrary they impact every single tax payer and quite possible the knockout punch lands more solid on the middle class. Some areas that may affect you:

·         Marginal tax rates are currently 10, 15, 25, 28, 33 and 35 percent. They will increase to 15, 28, 31, 36 and 39.6 percent.

·         While your marginal tax rate inflates your payroll tax is also scheduled to increase 2% as the payroll tax cut enacted under the Middle Class Tax Relief and Job Creation Act of 2012 expires.

·         “Marriage Penalty” relief disappears.

·         Fewer people will qualify for the Earned income Credit.

·         The Child Tax Credit will be reduced from $1000 to $500.

·         Maximum capital gains rates will revert from 15% to 20%.

·         Tax on dividends will go from 15% to the ordinary income rates; or a maximum tax rate of 39.6%.

·         More taxpayers will be subject to the dreaded Alternative Minimum Tax.

·         Coverdell Education Accounts maximum contribution will go from $2000 to $500.

·         The student loan interest deduction will be available to few individuals.

·         Elimination of 100% bonus depreciation, research credit, State and local sales tax deduction, teacher’s classroom expense deduction, mortgage insurance premium deduction, energy tax incentives AND cancellation of mortgage indebtedness exclusion for personal residence.

This is not intended to be and is not an all-inclusive list of the sunset provisions that will impact individuals. Yet, I’m sure each and every person reading this realizes the gravity of the situation. There are also many provisions that will impact businesses that will be discussed in a subsequent blog.

Extending these tax cuts is estimated to cost the government 2.84 million over the next 10 years. To complicate matters, Congress is currently confronted with mandatory reductions in federal spending under the Budget Control Act of 2011. Financially it seems unlikely that government can extend the provisions. However, the impact on individuals will be severe enough that to not extend at least some of the provisions may have dire political impact for the parties. Democrats and Republicans are at a standoff as to how to proceed and agreement before the November elections does not seem likely.

Next week we will explore some ways that you can plan for the sun setting of these provisions and perhaps accelerate some of your income during 2012 to take advantage of the still existing tax breaks before they expire. Tune in for more next Thursday and please comment with any questions you may have about the provisions set to sunset.