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Article Author:

2010: No tax increases yet; Should you try to recognize income?

Highlights:

• Lack of inflation leaves most tax provisions unchanged for 2010
• High-income itemized deduction & personal exemption phase-out eliminated in 2010
• 15% long-term capital gains scheduled to end after 2010
• See future proposed or actual tax increase scheduled to come online (separate articles)

One of the upsides of the recent economic turmoil has been negligible inflation since the end of 2008. As many individual income tax provisions are indexed to inflation, taxpayers can expect very few changes to these provisions in 2010. Tax provisions indexed to inflation include the personal and dependency exemptions, the standard deduction, tax-bracket thresholds, the gift-tax exclusion ($13,000), and retirement-plan income limitations. A notable exception is the AMT exemption amount.

The lack of 2010 inflation adjustments will have a mixed impact on taxpayers. While taxpayers will not see their exemptions and exclusions increase, tax-bracket thresholds and other income limitations will not increase either. The combined impact will be insignificant for most taxpayers.

A welcome change for 2010 is the sunset of limits on itemized deductions and personal exemptions. Under Section 68 of the Internal Revenue Code, individuals with adjusted gross income over a statutory amount (around $160,000 for married individuals) saw their total itemized deductions decreased by the lesser of 3% of their AGI over the limit up OR 80% of their total itemized deductions. As part of the sunset provisions, the disallowance was reduced by one-third in 2006 and 2007, and two-thirds in 2008 and 2009. The limitation is fully repealed in 2010 only.

Similar to the limit on itemized deductions, Internal Revenue Code Section 151(d)(3) set a limit on the personal exemption. Individuals with income over a statutory amount (around $160,000 for married individuals) saw their personal exemptions reduced by 2% for every $2,500 their AGI exceeded the threshold. The reduction was capped at two-thirds of the personal exemption amount. Similar to the itemized-deduction limit, the disallowance of the personal exemption was reduced by one-third in 2006 and 2007, and two-thirds in 2008 and 2009. The limitation will be fully repealed in 2010 only.

Last, but by no means least, there was a sunset provision within the Jobs and Growth Tax Relief Reconciliation Act of 2003. This provision terminates the 15% rate on long-term capital gains, and the law reverts back after 2010 to the law as it was without the provision. At present, such law would provide a 20% rate (or 18% for assets held over five years) for long-term capital gains for high-income taxpayers.

With the recent proposals for tax increases and the reversal of the Bush-era tax reductions at the end of 2010, this may be the year to defer deductions and recognize income. It seems so un-tax-wise  to recognize more taxable income early, but the 2010 rates might be at the lowest  you see for some time. It might be the last time you don’t complain about taxes!

For more information please contact Michael Calahan at  mcalahan@BlackmanKallick.com or 312-980-2996, or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.