Lame Duck not so Lame?

What Tax Law Changes will Congress Enact this Month? As this is written, the lame duck session of Congress is trying to tackle unfinished business prior to seating next year's newly elected legislators. This includes passing funding bills so the government does not shut down. Unfortunately, making decisions will be tough as existing Congressional representatives are limited in what the balance of Congress will accept knowing terms of many colleagues are winding down. So what can you plan on? Here are some fairly certain actions:   

Alternative Minimum Tax (AMT) Relief.   Both Democratic and Republican lawmakers have told the IRS that they are working on a bill to provide temporary relief for taxpayers facing the Alternative Minimum Tax (AMT). Without action by Congress, an estimated 20 million taxpayers would be faced with paying the AMT (known to some as the "hidden tax") when filing their 2010 taxes. While originally designed as a tax on high-income taxpayers, the AMT has threatened middle class taxpayers in recent years because the threshold income for paying the AMT has not been adjusted for inflation. Although there are numerous deadline-sensitive tax issues facing Congress right now, clear bipartisan support makes it likely that the AMT tax issue will be resolved before year's end. What to do? Try to remain flexible with income AND possible deductions. You may wish to shift income and deductions (like pre-payment of state property taxes) into the tax year that gives you the best tax benefit.  

Extenders Bill.   As stated last month, a number of tax breaks that expired in 2009 may be extended into 2010. Those that appear to have the greatest common ground are: 

• Teachers $250 expense deduction
• Sales tax deduction alternative as an itemized deduction
• Continuation of the Tuition Credit 

What to do? Plan as if these extensions will occur. If they do, you will be prepared with the right documentation to support the deduction.  

     2011 Taxes.   While not part of 2010 tax laws, what Congress does with taxes next year will determine what tax planning moves you may want to make this year. So be prepared for the following and be ready to make the necessary moves to reduce your tax burden in late December for: 

• Capital Gains tax rates going up an estimated 5% for most taxpayers
• Dividend tax rates going up from 5-15% to 15-39.6%
• Re-introduction of the marriage penalty in lower income brackets
• Re-introduction of the phase-out of deductions and personal exemptions
• Increase in almost all the tax brackets by approximately 5%
• Re-introduction of estate taxes 

There is talk about forwarding a bill during the lame duck session to extend some or all of the above for up to two years. What does this mean to you? Stay as flexible as possible. There are some things you can safely do this year to reduce taxes. Things like fully investing in your retirement accounts, reviewing your gift giving strategies, and making investment moves all still make sense. But you'll also want to be ready to take advantage of late passing legislation. Just don't hold your breath, this Congress has waited 11 months to address these impending changes. They may just decide to wait one more month and leave the work to newly elected legislators.