5 things you can do now to get ready for huge tax hikes in 2011
byJun 11th 2010 8:00AM
Even worse, state and local governments are struggling to make budgets balance. A whopping 45 states reported receiving less revenue in 2009 than in 2008, a trend that states can't sustain in 2010. Last year, at least 10 states considered major tax increases and others sought to increase or expand the tax base by hiking sales taxes or imposing excise taxes on such items as cigarettes and soda.
How can you avoid extra hits to your wallet in 2011? Here are five tips to consider:
- Move. While a number of states are increasing taxes in order to recover lost tax revenue, a handful are considering lowering taxes, at least for those taxpayers at the top. While states like California, Hawaii and Wisconsin are looking to boost taxes for millionaires, others such as New Jersey and Rhode Island are shaving taxes for those at the top. If you're not in the top tax bracket, you may still benefit from a move, since seven states impose no income tax at the state level: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. No-income-tax states have lured the likes of Tiger Woods, who reportedly moved to Florida simply to avoid additional tax. While a move may seem like a huge commitment, studies suggest that seeking out a more tax-favored state is becoming more popular for those of us who aren't sports professionals or rock stars. A move across the border from Oregon to Washington, for example, could mean more than 10% of your pay stays in your wallet.
- Convert to a Roth IRA. In 2010, a taxpayer with an existing traditional IRA can convert it to a Roth IRA regardless of income and without any prepayment penalty. Taxpayers can opt to pay federal income tax associated with the conversion over two years, but that might not be the best idea if rates are going up. Paying up in 2010 likely means a lower tax rate. And if rates continue to go up, you can breathe a sigh of relief, since future distributions from a Roth IRA will be paid out income tax free.
- Retire early. An early retirement these days generally means a lump sum payment as opposed to a long term pension. If you could take a lump sum now and pay tax at 35% rather than wait and pay tax at 39.6%, wouldn't you? The marginal tax savings on a $200,000 retirement package could net you $9,200 more if you take it in 2010 than waiting until 2011. Even if you're not retiring, consider cashing in those stock options. High income tax rates plus a dramatically low AMT exemption (not to mention a less than robust market) may make waiting less advantageous.
- Don't get married (or better yet, get a divorce). In 2001, Congress sought to end the so-called marriage penalty with changes to the standard deduction and income tax brackets. That means for 2010, the standard deduction for married couples is twice that for singles; married couples also have a wider tax bracket. In 2011, those provisions will expire so the standard deduction for married couples will fall to less than double what it is for single filers; and the ceiling of the 15% bracket for married couples will be reduced so that it is no longer double what it is for single filers. The result? Less tax savings for some married couples. Married couples who will lose out the most are those with disparate incomes, meaning couples who benefited by getting twice the tax benefits from one large income; working couples with similar incomes did not see as much benefit. While the penalty (or benefit, depending on where you fall on the tax scale) isn't necessarily a deal-breaker, its existence has given more than one couple pause to consider whether nuptials make financial sense.
- Die. Sure, it sounds dramatic. But if you're wealthy, it could save your heirs tons of money. As part of the Economic Growth and Tax Reconciliation Act of 2001, the federal estate tax is repealed for 2010 -- but only for 2010. In 2011, it is reinstated with a personal exemption of a mere $1 million and a flat tax rate of 55%. That can add up fairly quickly. Just ask Dan Duncan's family. The 77-year-old Texas tycoon died earlier this year with a fortune estimated by Forbes magazine to be worth $9 billion, the 74th wealthiest person in the world. His heirs will walk away with all $9 billion this year. Had he lived just nine months longer, Uncle Sam could have claimed $4.95 billion in federal estate tax.