While tax legislation can be notoriously unpredictable, it is a good idea to know what is currently on the table for consideration, even with tax day just 8 short months away!
Two big considerations will drive action in D.C. this year – the economy and the budget deficit. Obviously these actions will affect your tax situation. So, let’s discuss what we know today and what is scheduled to change in 2011. And keep in mind, this is not only about tax planning for 2010, but for years beyond.
Expiring Tax Cuts
In 2001 and 2003, tax breaks were enacted that are scheduled to expire in 2011. These breaks consisted primarily of reducing the top tax rates on capital gains, dividends and all other income. If no legislative action happens to reverse these expiring tax cuts, taxpayers will see the following tax rate changes in 2011:
From (2009 tax year) To (2010 tax year)
Capital gains: 15% -> 20%
Dividends: 15% -> 39.6%
Income: 35% -> 39.6%
These are substantial increases across the board. Fortunately for some, these increases may apply only to the wealthiest Americans (> $200,000 single or > $250,000 joint). Regardless of what happens, many believe that top tax rates will go up.
Therefore, now is the time to evaluate your income portfolio to determine if it’s time for asset reallocation. For example, consider shifting those dividend generating investments into capital gains generating investments. While this transaction may create a taxable sale now, you’ll be paying tax on those gains at a rate lower than what it may ultimately be in 2011. On the other hand, if you expect to sell at a loss, consider shifting the sale into 2011 where those capital losses will be more valuable if rates go up.
Lastly, if Congress does nothing about the alternative minimum tax (AMT) this year, 24 million additional Americans taxpayers will face paying the AMT this year. This scenario has played out each year for the last few years. What we have learned is that Congress generally acts on this “stealth” tax at the last possible minute to mitigate its impact.
And finally, the estate tax uncertainly still exists. While there is no estate tax at least for now, it is scheduled to come roaring back in 2011 at a rate of 55%. The exemption amount is $1 million. Obviously, the lack of certainly in this area makes planning difficult.
In summary, while no action has been taken yet on tax legislation for next year, it is prudent to keep an eye on it so you can anticipate its impact on your bottom line. Although I can’t predict what Congress will do with specific legislation, I think it’s safe to assume that high income taxpayers will see higher tax rates in the future. Use this as a guide for beginning your tax planning in 2011, and check back with us often as we’ll keep you updated here on tax changes you need to know about.