Business is on standby as people wait to see what the Obama Administration is going to do with the expiring tax cuts that were put in place during the George W. Bush Administration.

In 2001, Congress slashed taxes for the wealthy, the middle class, and the working poor and two years later they reduced taxes on investment gains and dividends. This was meant to stimulate growth on a weak economy during the 2001 recession.

These cuts are set to expire at the end of 2010 and everyone is watching to see what actions President Obama and his team will take.

Chief economist of Moody’s Analytics Mark Zandi said, “If those tax cuts expire for everybody, we go into a double-dip recession.” Not exactly what we needed to hear Mr. Zandi, but thank you for your honesty.

“Letting the tax cuts expire would cost a couple earning $50,000 a year with two children $2,900 more in federal taxes", according to a Liberty Tax Service® analysis. "A family of four earning $500,000 would pay $10,800 more."

That is a lot of money that could drastically change the way business owners and individuals do business. The theory is the cuts will keep more money in the hands of Americans thereby allowing them to spend and stimulate growth; on the other hand, it also means a larger deficit for the U.S. and that is not a popular option either. My gut says that the voting population would prefer money in their pocket over concerns of a growing deficit!

Meanwhile, you need to get your finances in order whether or not the cuts are extended. The following is a list of suggestions for year-end savings:

  • Make sure you are investing into your retirement accounts. It is always a good tax break to set aside money on a tax-deferred basis. I would fund a Roth IRA, then my 401k, and then any other tax sheltered investment. If you have a Roth 401k option, it is worth considering and potentially switching your investments.
  • Energy efficient home improvements! If you can invest in windows, air conditioners, water heaters, or any other equipment that qualifies you could receive a 30 percent tax credit and put up to $1,500 in your pocket. You need to make these purchases by December 31, 2010.
  • Make those deductions count! This year there isn’t a limit on itemized deduction, but starting in 2011, high income earners will have their deductions capped. People earning more than $100,000 will be limited to claiming deductions on charitable contributions, local taxes, or health-care costs.
  • Consider investing in flex accounts that allow you to pay child care and medical bills from a pre-tax account.

Although, at this point we are uncertain as to what President Obama will decide, we do know that several economists are encouraging the tax cuts to be extended for all taxpayers according to this CNN Money article. Essentially, every American will be paying more in taxes if the cuts aren’t extended and now is the time to be prepared.

-david rocci

Disclaimer: Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.