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Without getting political about the deficit and the upcoming votes on tax cuts, tax increases, and possible changes in tax deductions, you might find it prudent to do a few things at the end of the year in anticipation of certain possible actions. Know the parts of your personal financial condition that might be affected and how you might take steps today or in the short term to manage the effect the changes have on you. Almost no one wants to pay higher taxes.
First, take additional income in 2010 or defer your income into 2011. Depending not only on where you believe Congress will come down on extending the Bush tax cuts, what might be more important is where you believe your income might be in 2010 versus 2011. With some degree of certainty, you know where your income will be now with just a few paychecks likely remaining. We also know 2010 tax rates. If you believe there will be substantial differences between your 2010 and 2011 earnings, you might want to try to manage your income to occur in the year you believe will see it taxed the least. In Central Ohio, where I live, we also have state and local income tax rates and many areas have school income taxes. The fall elections might have impacted your state and local rates, as well.
How do you manage your income from one year to the next? For the self-employed, this is relatively easy if you can manage the trigger that generates your pay or the commission and if your employer will cooperate. Where I work, we can buy out our unused sick days up to a week’s pay in value or defer the days into a time-off bank. If you are expecting a bonus, see about getting it in something other than cash – stock or options, for example.
Another area of discussion with regard to the tax code right now is the mortgage interest deduction. If the deduction is lost, why not refinance your mortgage to lower your mortgage rate as much as possible. For some who have taken advantage of historically-low mortgage rates for much of this year, they will see but marginal benefit from the mortgage interest deduction this year, anyway. You might consider making your January mortgage payment in December to recognize the interest portion of the payment in 2010. It is probably too late to consider a home transaction to pull more mortgage interest deduction into 2010, however.
Related to mortgage interest are deductions like property taxes and sales taxes. You can see about paying your property taxes early to pull that deduction into 2010, particularly if you feel like your income in 2010 will be higher than in 2011. If you are considering a large purchase and you live in an area with high sales taxes, you can itemize actual sales tax payments over and above the calculated rate, if you have documentation.
Finally, an area to consider is your investment portfolio. It might be possible for you to manage your overall taxable income in 2010 by buying and selling in your portfolio. Do you have capital gains? Congress may alter the rate paid on long term capital gains in 2011. You might want to take the gains now or you might want to offset some gains with losses now or in 2011. What about dividends? The rate on dividends is also under consideration for increase in 2011. There might be some opportunities to get in or out of dividend-paying stocks at this point, but consideration in the price of the stock might already imply the dividend value.
Every person’s financial situation is unique. Rather than give advice in a one-size fits-all approach, it is important to understand and review key areas of your personal financial condition in light of the political “hot topics”. While we may not know with any certainty today how certain Congressional decisions might go, be aware of how you might be affected and see if you can manage your personal finances in light of possible outcomes.
More from this contributor:
The Annual Ritual: The Self Appraisal
What to Look for When Selecting a Mortgage Lender
Why Now Might Be a Good Time to Buy a Home