Finding Fast Cash is Going to be More Difficult in 2011

Some consumers in need of fast cash are using legal tax dodging as means to this end. No one knows how tax laws are going to change in the near future, but investors aren’t taking any chances. Without a doubt higher taxes are on the agenda for 2011 and consumers are acting quickly. Studies are showing that investors are pushing almost 50 percent more into tax-free municipal bonds as they did a year ago. For example, Fidelity Investments reported that its customers are quickly converting taxable IRAs into tax-free Roth IRAs at four times the rate they did last year.

Finding fast cash will likely get tougher soon

When it comes to which taxes are going to rise, the most likely are taxes on income and capital gains. The issue first came up about 20 years ago when the U.S. debt and deficit levels were at an all-time high. The most-used tools the government uses to fight financial deficits are spending cuts, budget slashing and of course, tax increases. That means that many Americans are soon going to have to maneuver with a hefty rise in cost when it comes to saving. The good news, however, is that the tax hikes most likely won’t happen in 2010. The recession’s aftermath is still weighing heavily on the economy and legislators are not going to start stressing the nation with new taxation. Their goal is to wait until things level off a bit more before pulling the tax card. That’s good news for investors and the reason why they are scrambling to stash money away quickly now.

The Roth IRA conversion

This is the first year where taxpayers are being allowed to convert to Roth IRAs from their regular IRAs, without regard to income levels. The former cut off was those whose annual income exceeded $100,000. They were left with no option for conversion. Regular IRAs take contributions from pre-tax dollars and increase tax-free for the owner. Payouts are fully taxable, however and required after a certain age is reached. Roth IRAs act differently and that’s where their attraction comes in. Contributions come in after-tax dollars and all payouts are tax-free. Fast cash is a higher potential with these types of savings vehicles due to their taxation profiles. In addition, the owner does not have to take a payout, which means higher taxation isn’t inevitable.

How capital gains fit into the mix

The government already has its sights on capital gains taxes and how to increase them. Again, 2010 is safe, but in 2011 the plan is to up the taxation rate on gains by a third. Should the Medicare taxes be added to that number, it will create an overall increase of 50 percent. The only consolation is that the proposed tax increase doesn’t get started to qualified dividends, or most stocks held by investors for over two months. The biggest way to fight against the taxation is for C-corporations and Subchapter S corporations to consider accelerating their dividends to this year or to leave them alone until the businesses are liquidated or sold.

Fighting against higher taxes

Consumers are left to face the inevitable raise of taxes but there is still some relief for those willing to act quickly. Though fast cash is harder to find than ever, it most likely will be even more elusive in 2011. Experts warn that pains should be taken now to decide what actions are the most advantageous and then consumers should act accordingly.

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