The Economic Growth and Taxation Relief Reconciliation Act (EGTRRA), more commonly called the Bush tax cuts, is scheduled to sunset on December 31st this year. Unless legislation is passed saying otherwise, all the provisions of EGTRRA will completely disappear on New Year’s Eve. Tax rates will revert to levels as if EGTRRA had never existed. If the Bush tax cuts expire taxes will go up for almost all Americans.
The current administration, however, has indicated they wish to preserve the tax cuts for all tax brackets under $250,000. If such legislation were passed we would find ourselves in a situation in which, for many Americans, it would be preferable to push their 2010 income into 2011.
A key metric in tax planning is your AGI (adjusted gross income). Many tax breaks have what are called phase out levels, income thresholds over which the benefits of tax breaks gradually decrease and eventually disappear entirely. Reducing your 2010 AGI will make you increase your eligibility for tax breaks and lessen the effects of phase out levels.
Regardless of whether your yearly income falls above or below the line of expected tax rate increases in 2011, it may be in your overall best interest to reduce your 2010 AGI. Every situation is of course unique. For some individuals the best course of action would be to accelerate their income into 2010 to take advantage of lower tax rates. But for others, even those who expect to face a tax increase in 2011, the benefits of tax breaks in 2010 may outweigh the losses in increased taxes in 2011. Figuring out what’s best for you requires comparative calculations and the counsel of tax professionals.
For more information and to make sure you make the best end of the year tax decisions, contact the Chicago tax lawyers at Horowitz & Weinstein.