Congress has adjourned for its August recess and we still have no extensions of tax law provisions that expired at the end of 2011 or any definitive answers on what will happen to tax rates and breaks set to expire at the end of this year. While the House and Senate each passed its own tax bill, no compromises were made that would allow either bill to generate sufficient votes in the other chamber.
Congress isn’t scheduled to return until Sept. 10, and many pundits believe no tax law changes will be passed by both the House and Senate until the lame duck session after the Nov. 6 election. Still others believe nothing will happen until the new year, with changes made retroactive to the beginning of 2012 or 2013 (depending on when a particular provision expired).
This continued uncertainty makes tax planning a challenge. For example, it’s difficult to determine how to best time your income and deductible expenses when you don’t know whether your tax rate will go up, go down or remain the same next year. Deferring income to the next year and accelerating deductible expenses into the current year typically is a good idea, because it will defer tax, which is usually beneficial.
But when you expect to be in a higher tax bracket next year — or you expect tax rates to go up — the opposite approach may be beneficial: Accelerating income will allow more income to be taxed at your current year’s lower rate. And deferring expenses will make the deductions more valuable, because deductions save more tax when you’re subject to a higher tax rate.