It may seem a bit strange to be talking about income taxes in September. There are, however, good reasons to think about taxes well before April 15. For starters, there are some big changes in the tax code that go into effect in 2011. Depending on your income tax bracket and investments, some simple planning now could save you a bundle later.
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And taking steps now to organize your tax files can avoid headaches and aggravation at tax time. So we've put together 5 tax moves to make now to take advantage of changing tax laws and to better prepare for tax season.
1. Evaluate Capital Gains: The current long-term capital gains tax rate, with some exceptions, is either 0 percent or 15 percent depending on what ordinary income tax rate you fall into. But in 2011, these rates jump to 10 percent and 20 percent. That means if you have some investments that have done well, you may want to consider selling them in 2010 to take advantage of the lower tax rates. If you currently fall within the 0 percent long-term capital gains rate, the decision may prove to be an easy one. But even for those that fall into the 15 percent bracket, saving 5 percent over next year's higher rate is significant. Of course, the tax consequences of an investment are just one factor to consider when deciding whether to sell.
2. Make Money Now: As you've probably heard, some of the higher income tax brackets will get even higher next year. The top two rates for the 2010 federal income tax brackets are 33 percent and 35 percent, which will move to 36 percent and 39.6 percent in 2011. The effect these changes will have on lower tax brackets depends on what Congress does this year, but the lower tax brackets are set to increase as well. If you fall into a rising tax bracket, it may be in your best interest to accelerate income into 2010 if at all possible. This could be particularly helpful for small business owners and independent contractors who have some control over the timing of income.
3. Green Your Home: There are several energy tax credits that are set to expire at the end of the year. For example, you can get a tax credit up to 30 percent of the cost ($1,500 maximum) on certain qualifying home improvements, such as roofs, water heaters, and HVAC systems. Make sure to verify that the product you want to install qualifies for the tax credit. And get the work done this year before the tax credit expires.
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4. Get Organized: Every year on April 15th at about 8 pm I tell myself I'll be better organized the following year. While it's taken several years of last-minute tax return filings to finally motivate me into action, this year I'm actually organized. The key is not to wait until tax season. Keep records of your taxable investments to help you calculate gains and losses. Keep your business receipts organized and separate from personal expenses. If you've made home improvements that qualify for tax credits, keep your receipts in a separate file. Staying organized takes just a few minutes week, but it can save you a lot of headaches when it comes time to file your taxes and will reduce the risk that you'll miss a tax deduction.
5. Plan Your Tax Preparation: Many use online tax software to prepare and file their tax returns. For those folks, they have some time before the 2011 versions of the tax software are released. But if you plan to have a tax professional prepare your return, there are good reasons to hire them now. First, you can take your time to find the best tax professional for your needs, taking into consideration recommendations from friends and family. Second, they can further assist you with tax planning now in anticipation of the many changes to the tax code in 2011.
It's important to recognize that tax planning is specific to each individual's situation and can involve complex analysis. So if you think some of these tax moves may be right for you, consult with a tax specialist before making any decisions.
DR is the founder of the popular personal finance blog, the Dough Roller and credit card review site, Credit Card Offers IQ.
WASHINGTON – Federal Reserve Chairman Ben Bernanke told a panel investigating the financial crisis that regulators must be ready to shutter the largest institutions if they threaten to bring down the financial system.
"If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved," Bernanke said Thursday while testifying before the Financial Crisis Inquiry Commission.
Bernanke also said it was impossible for the Fed to rescue Lehman Brothers from bankruptcy in 2008 because the Wall Street firm lacked sufficient collateral to secure a loan. Lehman's former chief executive told the panel a day earlier that the firm could have been saved, but regulators refused to provide help.
The Fed chief presented his analysis of the crisis and views on potential systemwide risks as the panel approaches the end of its yearlong investigation into the Wall Street meltdown.
The financial overhaul law enacted this summer gives regulators the authority to shut down firms when their collapse poses a broader threat to the system. The process resembles the one used by the Federal Deposit Insurance Corp. to close failing banks.
FDIC Chairman Sheila Bair told the panel "the stakes are high" for regulators to effectively exercise their new powers.
If not, "we will have forfeited this historic chance to put our financial system on a sounder and safer path in the future," Bair said. "The tools are there. The regulators have to use them," she testified.
Panel Chairman Phil Angelides said the new law will be an enormous test of will of the regulators.
Bair and Bernanke said tougher rules and market pressures will lead huge firms to voluntarily shrink themselves. Executives can no longer count on the government to bail them out if they veer toward failure, they said.
Bernanke said that bailing out these institutions is not a healthy solution and great improvement will come from the new law.
"Too-big-to-fail financial institutions were both a source ... of the crisis and among the primary impediments to policymakers' efforts to contain it," Bernanke said.
"We should not imagine ... that it is possible to prevent all crises," he said. "To achieve both sustained growth and stability, we need to provide a framework which promotes the appropriate mix of prudence, risk-taking and innovation in our financial system."
Bernanke led the economy through the financial crisis and the worst recession since the 1930s. The Federal Reserve took extraordinary measures to inject hundreds of billions into the battered financial system.
Last week he said the central bank is prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly.
Members of the congressionally appointed panel have questioned the government's decision to let Lehman fall while injecting billions of dollars into other big financial institutions during the crisis.
Former Lehman CEO Richard S. Fuld Jr. testified Wednesday that the firm could have been rescued. But the regulators refused to help — even though they later bailed out other big banks.
Bernanke disagreed. He said bailing out Lehman would have saddled the taxpayers with billions of dollars in losses.
"It was with great reluctance and sadness that I conceded there was no other option" than allowing Lehman to fail, he said.
Asked how the Lehman case differed from that of American International Group Inc., which received $182 billion in taxpayer aid, Bernanke said there was a fundamental difference.
AIG, as the biggest insurance company in the U.S., had valuable assets which could back up the Fed's emergency loan, he said.
"The Federal Reserve will absolutely be paid back by AIG," Bernanke said.
BUCHAREST, Romania – Romania's unpopular government was in turmoil Thursday after the prime minister fired five Cabinet ministers, with the economy minister also saying he will quit.
Romania is mired in recession and the government has slashed public sector wages by a quarter and hiked sales tax from 19 to 24 percent on July 1 to reduce the budget deficit — measures derided by Romanians but requested by the International Monetary Fund.
The cutbacks are aimed at meeting conditions for a euro20 billion loan from the IMF, the European Union and the World Bank to bail the country out of serious financial difficulty it encountered last year, when its economy contracted by 7.1 percent. Some of the money was used to pay pensions and wages.
Prime Minister Emil Boc fired the finance minister, labor minister, agriculture minister, transportation and communications minister. Economy Minister Adriean Videanu has told Boc he wants to quit the government to return to party business.
Finance Minister Sebastian Vladescu criticized his firing saying it was politically motivated. Earlier this summer, he was chastened by Boc for saying that Romania would scrap the flat personal income tax in favor of a progressive tax system that taxes top earners at a higher rate. Vladescu had played a key role in IMF negotiations.
David Oxley, an emerging market economist for Capital Economics in London said: "The question is whether there is the political will to make the cutbacks. Will (the firings) affect the political will?" he told the Associated Press.
Several key members of the governing Democratic Liberal Party called for Boc to resign. The government's popularity has plummeted in recent months because of spending cuts, but also due to a growing dissatisfaction with President Traian Basescu, who is seen as playing a key though informal role in government affairs.
The leu, Romania's currency, dipped by 0.3 per cent following the news.
The IMF has predicted that Romania's economy will shrink by 1.9 percent this year, in 2009, before returning to growth in 2011.
The opposition Social Democrats have said they will file a motion of no-confidence, but it is not clear whether it can succeed because Boc's Democratic Liberal Party has the support of minority ethnic Hungarians whose party is also in government.
Political instability has plagued Romania in the last year before presidential elections which Basescu won. Boc's previous government collapsed last year which led to the temporary suspension of Romania's IMF agreement.