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

The end of the year is approaching but it’s not too late to reduce this year’s tax bill. However you need to be careful not to do anything that will cause you to pay more in 2010 than you would save on your 2009 federal income tax. Here are three year-end tax strategies for individuals from the experts at smartmoney.com

1. Sell Loser Stocks Held in Taxable Accounts

Cut your losses by selling those doggy investments held in taxable brokerage firm accounts. The amount you lose can lower your 2009 tax bill because you can deduct capital losses against your capital gains for the year. If your losses exceed your gains, you’ll have a net capital loss for the year. You can deduct up to $3,000 of net capital loss against your 2009 ordinary income from salary, self-employment activities, alimony received, interest or whatever (the net capital loss deduction limit is only $1,500 if you used married filing separate status). Any excess net capital loss is carried forward to 2010 and beyond and will generate future tax savings.

2. Take the Standard Deduction

If your total itemized deductions are usually close to the standard deduction amount each year, consider the strategy of bunching together expenditures for itemized deduction items every other year. Itemize in those years to deduct more than the standard deduction figure. Then claim the standard deduction in the intervening years. Over time, this drill can save hundreds or even thousands in taxes by significantly increasing your cumulative write-offs. Why?

Because you’ll bag higher itemized deductions in alternating years and relatively generous standarddeductions in the other years. Regardless of what happens with future tax rates, you’ll come out ahead. For 2009, the standard deduction is $11,400 for married joint-filing couples versus $5,700 for singles and $8,350 for heads of households. For 2010, the numbers remain the same — except the standard deduction for heads of households increases ever so slightly, to $8,400.

3. Give to Charities

Thanks to this year’s stock market rebound, you probably have some appreciated shares (currently worth more than you paid for them) that you’ve owned for over a year. If so, consider donating them to IRS-approved charities. You can generally claim an itemized charitable contribution deduction for the full market value at the time of the donation and avoid any capital gains tax hit. On the other hand, don’t donate loser stocks. Sell them, book the resulting capital loss, and give away the cash sales proceeds. That way, you can generally write off the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Warning: You must itemize deductions to gain any tax-saving benefit from these charitable donation ideas.

source: smartmoney.com – Year-End Tax Prep Strategies for Individuals

According to Bloomberg, on average,the wealthiest Americans income doubled in the first six years of the Bush administration due to a 17.2 percent tax rate reduction.

The 17.2 percent tax rate in 2006 was the lowest since the IRS began tracking the 400 largest taxpayers in 1992, although the richest 400 Americans paid more tax on an inflation-adjusted basis than any year since 2000.

The drop from 2001’s tax rate of 22.9 percent was due largely to ex-President George W. Bush’s push to cut tax rates on most capital gains to 15 percent in 2003.

Capital gains made up 63 percent of the richest 400 Americans’ adjusted gross income in 2006, or a combined $66.1 billion, according to the data. In all, the 400 wealthiest Americans reported a combined $105.3 billion of adjusted gross income in 2006, the most recent year for which the IRS has data.

“The big explosion in income for this group is clearly on the capital gains side, although there are also sharp increases in dividend and interest income,” said Dean Baker, co-director of the Center for Economic Policy and Research in Washington.

In addition, “they are realizing more of their gains due to the lower tax rate,” Baker said.

The data show that the population of the top 400 income- earners has fluctuated over the 15 years the agency has tracked it, according to an analysis by the Washington-based Tax Foundation, a research group. Some 3,305 different taxpayers have been included at least once on the list, the Tax Foundation said. Only 27 percent of those taxpayers have appeared more than once on the list, and only about 15 percent have been on it more than twice.

Ammunition for Democrats

The data may provide ammunition for Democrats such as House Speaker Nancy Pelosi who say they intend to increase the capital gains tax rate even as the credit crunch roils markets and is producing more investment losses than gains.

President Barack Obama pledged during the presidential campaign to increase the rate. He has said he wants to let the rate rise to 20 percent for families making more than $250,000 and eliminate it for small businesses.

“My guess is that Obama still will not rush to do anything on this” because of likely negative reactions from Republicans and the stock market, Baker said. “We’re talking late in the year or early next year.”

The richest 400 Americans collectively paid $18.1 billion in taxes in 2006, the highest in the 15-year period and 1.77 percent of all income taxes paid in the United States; on an inflation- adjusted basis, the dollar amount was the highest since 2000.