What’s coming down the pike?

Every year, while Santa and his elves step up the North Pole production line to capacity, your congressmen and senators on the finance committees finalize tax policy. It’s the same game every year—we accountants guess, we forecast, we even lobby to try and figure out what “they” are going to do, so we can do tax planning for our clients.

For instance, for the past several years teachers have been eligible for a special, temporary $250 deduction for classroom supplies and other “teacher” expenses. This deduction is considered temporary because every year it was billed as a one-year deduction. And in each of the last several years, the deduction has been continued, including for 2010. Thank you, Congress for that holiday present. 

So what’s coming down the pike for 2010 tax filing came down the chimney during the holidays. That is basically an extension of what people call the “Bush tax cuts” through 2012.  Rates are not jumping up as many feared they would under the Obama Administration. The AMT (Alternative Minimum Tax) does not extend its claws further into the middle class. The deductions for teachers’ supplies, sales tax, and college tuition (however meager) remain for this and the next two tax filing seasons.

And while I do not have a crystal ball, my prediction is that beyond 2012 the likelihood of seeing a 39 percent tax rate for $250,000 incomes is slim to none. The reasoning:  President Obama has a tough re-election road ahead of him as it is before getting into his tax policy. (Never mind that an Obama tax plan actually reduces taxes for 90 percent of Americans, and remember Joe the Plumber?  I haven’t done his 1040 Form, but do you think that guy is netting $250,000?)

 I digress. There is one tax change that affects most of you, and that is, a one-year, 2 percent reduction in the amount of Social Security tax you are paying. The maximum benefit is $2,136 (2 percent of $106,800, which is the point at which you stop contributing to Social Security). If you are a wage earner, there’s nothing you need to do —you have already begun receiving this benefit through your paychecks. However, if you are self-employed, we may need to refigure (read:  lower) your estimated tax payments for 2011.

Some small businesses (those with 25 or fewer employees), who offer health benefits to their employees, may be eligible for a Health Care credit. The maximum credit is 35 percent of the employer’s cost of health insurance benefits if the average wages paid are less than $50,000 per year. This credit enables employers to affordably offer health coverage even as the insurance companies have scored double-digit premium increases for 2011.

A couple more items:

• Last year, the IRS allowed an extra standard deduction for a person owning a home and paying real estate taxes. That benefit is gone for 2010. 
• And for those of you who replaced your cars in 2010 (myself included), 2009 would have been the year to do it, because the special deduction for sales tax paid on a new vehicle was not renewed for this year.

Finally, for those who think lady luck might be on your side, your lottery winnings may be taxable. In the past, New Jersey did not impose income tax on lottery winnings, no matter the amount. Now, lottery winnings in excess of $10,000 are taxable to the IRS and New Jersey. Of course, your gambling losses are deductible to the extent of your winnings.

So, what to expect? Slightly fatter paychecks in 2011, favorable dividend and capital gains tax rates, and some adjustments on deductions. There is a bit to be jolly about.