Federal Tax Cut Extensions
December 6, 2010
TurboTax VP of consumer advocacy, Bob Meighan, spoke with me not long ago about the tax cuts expiring this year. About a year ago Bob and I talked about the TurboTax online edition and tax software vs manual tax returns but this time the main focus was on tax legislation.
Since we talked there’s actually been movement in Congress towards extending the tax cuts, which is a good thing for us tax payers. There’s been a lot of anxiety around the Bush-era tax cuts and not knowing what will happen in 2010 and 2011 has made year end tax planning more difficult.
There are a few misperceptions that Bob’s encountered surrounding the tax law discussion that he would like to clear up. The first common misperception is that the tax law changes would impact your 2010 federal tax brackets. Although you might make certain decisions in 2010 based on the 2011 tax laws, the tax laws that are expiring won’t have a direct impact on your 2010 taxes.
The second misunderstood point has to do with who will be impacted if the tax cuts are not extended. Tax rates will go up for almost everyone in the US, not just the wealthy. The increases will be bigger for higher tax brackets but most of us will see the impact in some way.
Certain groups of people have the potential to be hit harder than others by expiring tax cuts. Bob pointed out that if the rates and thresholds are not adjusted for the Alternative Minimum Tax (AMT) that around 25 million additional people, mostly middle class, will be impacted by the AMT.
Married couples will also feel the bite if the tax cuts are not extended. Right now, the standard deduction for married couples filing jointly is twice that of a single filer. If allowed to revert to where it was before being addressed in 2003, the standard deduction for these married couples will mean they get a smaller deduction than they would as two single people.
Retirees who live on fixed incomes will be impacted by the changes on how income and dividends are taxed. If the top tax rate on dividends increases from 15% to 39.6%, as would happen if the tax laws expire, then people on fixed incomes would take a big hit.
The next thing I asked Bob is what we can do prepare for these tax increases. Although we don’t have control over what Congress decides to do about extending the tax cuts, there are a few things we can do to help our tax situation.
Contribute to Retirement Accounts – Putting money into your IRA or 401k can lower your taxable income and potentially move you to a lower tax bracket. If tax rates do increase then being in a lower tax bracket can make an even bigger difference than it does now. Plus, investing in your retirement is good regardless of where tax rates go.
Charitable Donations – Money you give to qualified charitable organizations earns you a tax deduction. It’s not just cash that has tax implications, donating items or investments can also earn you deductions. And don’t forget about deducting mileage incurred in doing voluntary work for charitable organizations.
Be Prepared – Sit down and look at your tax alternatives now. Plan for several contingencies so when Congress does decide what to do you can take action quickly.
I asked Bob how long it would take for Turbo Tax to update their software once Congress makes a decision on extending the tax cuts. I figured it would take a while but apparently the Turbo Tax team of tax experts and software developers have been tracking the issues and updating the software to handle the majority of scenarios.
One neat thing for the growing number of Turbo Tax online users is that the online edition automatically updates with the latest changes so the user doesn’t have to worry about downloading the updates.
Something else cool that TurboTax is offering is free tax advice for it’s customers. If you have any questions about the tax laws and your specific situation you can ask the tax experts at Turbo Tax up until January 31st. Until that time they’re offering to answer one tax question for each person for free at FreeTaxQuestion.com
All posts by Ben Edwards