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Is the Year of Avoiding Taxes?
By Matthew Bandyk
In a speech last May, President Obama said, "Nobody likes paying taxes . . . . And
yet, even as most American citizens and businesses meet these responsibilities, there
are others who are shirking theirs." He was referring to offshore tax havens and other
loopholes that wealthy Americans often exploit to reduce their tax burden. But it
doesn't take moving money to Switzerland to avoid paying taxes. If history is any
guide, 2010 will be a year in which many Americans use a few simple methods to
reduce their tax liability, which could potentially cost the government billions of
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This year is the last before the expiration of tax cuts originally put in place by the
Bush administration. If Congress allows these tax cuts to expire, as the president
supports, in 2011 the top marginal tax rates will increase from 28, 33, and 35 percent
to 31, 36, and 39.6 percent.
Although it is not certain that tax rates will go up, many wealthy Americans are
looking at 2010 as the end of the party. "Everybody thinks taxes are going up and tax
breaks are being eliminated. Everybody's thinking this, and they're planning for it,"
says Lance Wallach, a New York author, lecturer, and financial consultant who
advises high net-worth clients, including entertainers and athletes. His phone is ringing
off the hook with questions from clients about how they can take advantage of this
year's rates relative to 2011's.
One of the most popular strategies is moving income from 2011 to this year. Usually,
accountants encourage clients to postpone income so there is less income taxed in
one year. But in 2010, the incentives have flipped. "This is the exact opposite.
Accelerating your income makes 100 percent sense," says Wallach.
Creative maneuvering. This would not be the first year taxpayers have pursued this
strategy. In 1992, Bill Clinton was elected president with promises to raise taxes on
wealthy Americans, which Congress did in 1993, boosting the top marginal rate from
31 to 39.6 percent. In late 1992, many taxpayers, expecting rates to be higher the
next year because of Clinton's victory, moved more income onto 1992's tax return to
avoid paying more with the higher rate. Robert Carroll, an economist at a Washington
research organization called the Tax Foundation, estimates that about $20 billion was
shifted and paid at the 31 percent rate rather than the 39.6 percent—meaning there
was about $1.5 billion that the federal government did not collect in revenue.
Something similar could happen this year. "Anyone who has flexibility with income is
going to try to shift their income," says Carroll. An example of flexibility would be a
business owner who gives himself or herself a bonus in December 2010 rather than
There's also an incentive to delay tax deductions. For example, state property and
income taxes can be deducted from federal income tax returns. Wallach says he is
recommending that clients hold off on paying those taxes until next year, so that the
deductions can be cashed in at the higher rate.
Some may choose to delay charitable gifts for the same reason—charitable giving is
tax deductible, so some taxpayers may decide to hold off on a gift they would make
in 2010 and instead give a larger amount in 2011. "What we know from history, if the
taxes go up, people will delay their giving," says Nancy Raybin, chair of the Giving
Institute, an association of nonprofit consultants. But Raybin says such delays usually
are not significantly damaging to charities because people will often just push a gift
forward a few months—from December to January, for example. "If there's a 12-
month delay, it could be a problem. But if a donor is just delaying one month, it's not
a big problem," she says.
These tax-avoidance strategies will probably be a one-time deal for those who pursue
them. A study by economist Austan Goolsbee, currently a member of the Council of
Economic Advisers, found that the 1993 drop-off in reported income was temporary.
Income bounced back in following years. If tax rates appear to be steady after 2011,
accelerating one's income or delaying deductions is no longer advantageous. But
taxpayers will continue to look for ways to reduce their liability—they just need the
time and money to find the loopholes. Wallach says most of his clients will adjust to
higher tax rates with his help. "For the very sophisticated people, there will always be
loopholes," he says, such as deducting travel and entertainment expenses. "None of
my clients pay more in taxes than a schoolteacher."