Should You Accelerate Income to 2010?
A number of my clients are considering various transactions that will accelerate income from later years into 2010. The transactions include selling a business, declaring dividends from a closely held business, selling appreciated assets such as marketable securities or real estate, or converting an IRA to a Roth IRA.
One client is guaranteeing a $10 million bank loan to a company that owes her $10 million from purchasing her business 3 years ago. The company will use the loan to prepay the remaining balance of the note so that my client can pay a 15% capital gains tax rather than the scheduled 20% rate for 2011 and 2012, and the 23.8% rate for payments made in 2013 and future years.
The reason for accelerating income to 2010 is because the Bush-era tax cuts are scheduled to expire at the end of 2010. If the tax cuts fully expire, the change in income tax rates from 2010 to 2011 will represent the largest income tax increase in the history of our country.
Congress may not allow the tax cuts to fully expire. There is a “Democratic Plan,” which has been endorsed by the President, that will only allow the tax cuts to expire for taxpayers making more than $250,000 per year. The Democratic Plan would retain 2010 tax rates for taxpayers making less than $250,000 per year.
The “Republican Plan” would permanently extend all of the Bush-era tax cuts.
This matter will be considered by Congress after the November elections. It is possible that there will be a compromise. It is also possible that there will be gridlock and nothing will be done, similar to what happened at the end of 2009 with respect to estate taxes.
The attached article written by Mark Robyn and published by The Tax Foundation shows the increase in taxes for several different groups of taxpayers under possible alternative plans. Due to the potential for higher tax rates beginning next year, you should seriously consider accelerating income to 2010.
