The end of the year is traditionally a time for many people to assess their financial situation – often with the help of a tax expert – and make some decisions that can result in lower tax obligations. For example: making a contribution into an IRA before you file your taxes adds a tax benefit for that year and is often a strategy recommended by a tax professional.
But these past few years have been especially important far as tax planning services goes, so much so, that it makes sense for anyone except a person with no investments and the very simplest of tax returns to seek the advice of an expert to make the proper tax planning decisions before the end of the year.
Why? There are several compelling reasons.
The first is that the so-called marginal tax rates that exist this year and dictate how much people pay in taxes depending on their level of income – 10 percent, 25 percent, 31 percent, etc. – will more than likely be replaced by a higher tax rate. If the Bush tax cuts ever expire, the 10 percent level will be eliminated, while two higher income tax brackets for upper income citizens will be added. The bottom line: Many Americans will be in a higher tax bracket in the future if things don’t change.
A second factor has to do with a number of tax breaks approved by former President Bush that were expected to expire at the end of 2009. This includes, for example, credits for higher education costs and the phasing out of deductions available to higher-income Americans in 2011. You might look at some of the tax breaks being eliminated and decide that it makes sense to maximize potential deductions, including education costs, before the end of the year.
But that’s where yet another uncertainty arises. There is still time left before the end of the year. It’s possible that Congress will enact some changes before Dec. 31 that could have a dramatic impact on the year-end picture for tax planning services. The best way to ensure you don’t make a bad decision is to consult an expert whose job involves following the decisions that Congress and President Obama make as it affects tax planning.
Editor’s Note: This post was written prior to President Obama’s proposal. At this time, his proposal still needs to pass through the legislative process. However, it looks like rates will not change for another two years at least. But things could still change prior to year end, so consider a tax professional to help you sort things out.
Of course, if you simply can’t justify giving any money to a CPA, there is a free tax service available that can provide a lot of information about your tax situation and whether you are likely to owe any money to the government. One that comes to mind is the TurboTax free tool TaxCaster. As long as you have the information about your income, the taxcaster will estimate if you should expect a check back from the government. You can even run through scenarios in which you make charitable contributions or end-of-the-year payments to an IRA to see the impact it has on a potential tax refund.
If, however, you itemize your tax return, and especially if you took advantage of any credits or exemptions on last year’s tax return, it makes sense to seek tax planning services this year from a professional. He or she can help you decide whether it’s better to take advantage of all possible deductions before the end of this year, defer income into 2011 if possible, as well as other tax-planning strategies.
Have you used year-end tax planning services before? What was your experience like?
(Photo by David Reber’s Hammer Photography)