Don’t look to your tax planner for help in preparing a 2010 tax strategy, at least not until Congress quits the political games and resolves the issue on tax cuts.

At the end of 2010, tax cuts enacted during the Bush years (2001 and 2003) are scheduled to expire, which will increase federal income tax rates for some Americans. Also at stake are taxes on dividends and capital gains, as well as tax credits and deductions.

Most Democrats and Republicans agree the middle class should not have to face tax hikes. But what about high-earners, families with income above $250,000 and singles above $200,000? Therein lies the battle.

The Obama administration favors allowing the Bush tax cuts to expire for wealthier Americans. Treasury Secretary Timothy Geithner this week argued the Administration plan would raise billions for the government with minimal impact on the economy.

“The top 2% are the least likely to spend those tax cuts, certainly not in comparison to the 98% of Americans who make less than $250,000 per-year,” said Geithner.

Republicans, though, are firmly opposed to the Administration plan. “We don’t believe anybody should face a tax hike, particularly in a recession,” said Don Stewart, press secretary for Republican Senate Minority Leader Mitch McConnell.

“It’s clear they want to hold hostage tax cuts for the middle class for their desire for more tax cuts for the wealthy,” countered Jim Manley, spokesman for Democratic Senate Leader Harry Reid.

As the tax rate deadline ticks, professional tax planners are growing impatient.

“They’re dysfunctional,” complained Evan Snapper, financial advisor with Anchin Block & Anchin. “It’s terrible. It’s a political game that’s hurting the country.”

Usually accountants advise clients to defer income and investment gains until the following year — why owe taxes now when you can put them off?

But the possibility of higher tax rates in 2011 calls that logic into question.

“It’s tax planning turned on its head,” said Doug Flynn, a certified financial planner at Flynn Zito Capital Management.

Because of the uncertainty, planners can’t yet advise clients whether to sell real estate, stocks and bonds or to convert traditional Individual Retirement Accounts into Roth IRAs, which requires payment of taxes on investment gains.

“It’s putting us almost in a standstill. We’re trying to get our ammunition ready, but we’re not certain what ammunition to load,” said Steven Bandini, a certified public accountant at Zapken & Loeb.

And for entrepreneurs who have to worry about both business and personal income taxes, it’s added an extra layer of uncertainty on top of the sluggish economy.

New York business owner Ellen Donath says she’s won’t even consider hiring additional staff, until the issue is resolved because she’s unsure of whether more of her company’s revenue will have to go for taxes.

“You don’t have a clue of what you can do,” said Donath, who runs Donath Communications, an advertising, marketing and design firm. “When you know what the rules of the game are, then you can play the game.”

source: money.cnn.com

Stock market investors experienced a roller coaster year in 2009. The market plunged in the first quarter and then surged 65% to finish out the year, one of the strongest market surges in recent history.  This market volatility may raise income tax questions for investors who made stock transactions in 2009.

If you are an investor who made stock transactions last year, especially in mutual funds or retirement plans, it makes sense to meet with your tax advisor to see if there are any income tax implications and/or a tax strategy to follow.

If you took a loss on your 2009 income tax return by selling a mutual fund in December 2009 (outside of a retirement plan), and you want to buy the same mutual fund in 2010, you must wait more than 30 days.  Failing to wait the 30 days violates the “wash sale” rule and you will not be able to use this tax benefit of the loss in 2009.  Contact your tax advisor for more details on this income tax question.

Another income tax question for your tax advisor is whether you should convert your traditional IRA into a Roth IRA.  Starting this year, anyone can convert their traditional IRA to a Roth IRA. Previously, taxpayers with adjusted gross income over $100,000 were prohibited from using this tax strategy.

Taxpayers who convert their traditional IRA to Roth IRA have to pay income tax on the amount converted to the Roth IRA.  However, any after-tax contributions that were made are excluded from the income tax.

There is some good news if you plan on converting your IRA to a Roth IRA in 2010. For conversion made in 2010 only, Congress has approved a rule to allow taxpayers to report the income from Roth IRA conversions over the next two years - half in 2011 and the half in 2012.   Potential Roth IRA converters need to be aware that future withdrawals from a Roth IRA, that includes earnings, are free from federal income tax only after you have reached 59 1/2 and the account has been opened for at least five years.

The Federal Income Tax form and IRS rules can get very complicated when it comes to stock transactions.  If you have made stock transactions or are considering converting your traditional IRA to a Roth IRA, we advise talking to a tax advisor to answer your income tax questions and recommend a tax strategy.

source: valpolife.com

The month of April brings warm weather, major league baseball and the deadline for filing your 2010 income tax return? If you haven’t prepared your income tax, you still have options for filing before the April 15 tax deadline. Here are some of the options for filing your tax return.

The quickest and most efficient way to get your tax return in on time is to sign up for one of the many online tax services. They provide the software so you can file your income tax online. Most online tax services offer the service for free or at a steep discount. Taxpayers can also find tax coupons online by using searching the web using the keyword phrase “tax coupons”.

Another option is to contact the IRS. The IRS provides a free income tax preparation program for individuals earning less than $49,000 who cannot prepare their own federal income tax returns. The IRS Volunteer Income Tax Assistance (VITA) will help taxpayers prepare their income tax and help answer tax questions about special credits, such as Earned Income Tax Credit, Child Tax Credit, and Credit for the Disabled. The program offers free electronic tax filing (e-filing) at most of it’s sites. For more information on TCE, call 1-800-829-1040 or log onto www.irs.gov

Individuals who have tax problems or complicated tax situations should contact an income tax lawyer or tax consultant immediately. Tax lawyers can answer your income tax questions and act as your tax representative to the IRS. If you have serious tax problems, the price for a consultation with a tax attorney is worth it.

If you will not meet the tax deadline, you can file for a tax extension. Taxpayers have 3 choices for filing the income tax extension form (Form 4868, Application For Automatic Extension of Time To File U.S. Individual Tax Return); electronically, by paying part of your tax due with a credit card through an outside service provider listed on the form, or by mail.

If you file your Form 4868 electronically you will receive an acknowledgment or confirmation number and you do not need to mail in Form 4868. If you need to pay additional taxes, you may do so through the outside service provider or through e-file. Be advised that each tax service provider will charge a convenience fee based on the amount of the tax payment.

These are the most common options available for filing your tax return. For more information about income tax or filing an income tax extension visit the IRS website.

source: irs.gov

What should you do if you made a mistake on your federal tax return that you’ve already filed? Well, it depends on the type of mistake you made.

If you made a mathematical error why calculating your federal income tax, chances are it will be caught by the IRS processing of your tax return.

If your mistake was that you failed to include the required Income Tax Schedule(s), the IRS will contact you to supply the missing information.

If the mistake on your federal tax return was that you did not report all your income or did not claim a credit, you should file an amended or corrected return using Form 1040X, Amended U.S. Individual Income Tax Return.

When you file your amended income tax return don’t forget to Include copies of any tax schedules that have been changed and make sure to add any Form W-2 you did not include.

If you are claiming a refund on the Amended Income Tax Return, it must be received within 3 years after the date you filed your original income tax return or within two years after the date you paid the tax, whichever is later.

It will take the IRS 8 - 12 weeks to process your amended income tax return.

If you made a mistake on your federal tax return you already filed and the IRS contacts you, make sure to respond in a timely manner.

source: www.irs.gov