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July 2010

Tax Rates Are on the Rise

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Chris Doolittle
Advisor Archive
Over the next few years, tax rates are scheduled to rise at stair-step intervals:  a little increase here, a little increase there. These measured changes present an opportunity to lower your total income tax liability by accelerating income and deferring deductions. Advancing income allows you to take advantage of lower current tax rates, while deferring deductions helps lessen the blow of increased future tax rates.

The following table and graphs detail anticipated federal tax rates through 2013 for wages, taxable retirement distributions, investment income, partnership income, S corporation income and C corporation income.

Tax Rates
Wages

Retirement
Capital Gains

Dividends
Passive Income

S Corp Income
Partnership Income

Potential opportunities to accelerate taxable income include:

  • Accelerating cash collections prior to year-end for cash basis taxpayers
  • Exploring accounting method changes to advance income
  • Revoking the last-in, first-out election for inventories
  • Paying taxable dividends out of accumulated corporate earnings
  • Accelerating installment sale proceeds or electing out of the installment method
  • Converting retirement savings to a Roth IRA

Potential opportunities to defer deductions include:

  • Avoiding the payment or prepayment of certain expenses prior to year-end for cash basis taxpayers
  • Exploring accounting method changes to defer expenses
  • Electing slower depreciation methods
  • Considering opportunities to capitalize costs rather than expense them
  • Deferring payment of accrued bonuses
  • Investing in Roth IRA or Roth 401(k) vs. regular IRA or 401(k)

Future legislation may further increase tax rates, encouraging taxpayers to take advantage of today’s cheaper rates. Please contact your BKD tax advisor to discuss planning strategies for lowering your exposure to rising tax rates.

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