Don't Look Now…Tax Rates are Headed Up!

The Bush era tax cuts are expiring.  Here are some of the key tax rates for 2010 and 2011:

2010                 2011

Ordinary Income                                   35%                 39.6%
Long Term Capital Gains                       15%                 20%
Qualifying Dividends                             15%                 39.6%
Estate Tax                                              0%                 55%

Unless Congress decides to do something different, we are stuck with these tax rates.  The numbers may need a little explanation.

  • For ordinary income, we are stating the maximum tax bracket.  As you can see, this is going up from 35% to 39.6%.  This is quite a jump.
  • Qualifying dividends will be taxed at ordinary income tax rates up to 39.6%.
  • The estate tax is quite interesting.  There is no estate tax in 2010.  However, it comes back in spades in 2011.  There is only a $1 million exclusion and the federal estate tax rate is 55%. 

What can you do about this?

You MAY want to accelerate income in 2010 based on the income tax increase.  I know this is contrary to what you have been taught your whole life.  You’ll have to run the numbers to see if this is appropriate.

For capital gains, you may want to recognize these in 2010.  However, be cautious of the Alternative Minimum Tax (“AMT”).  This is a nasty backdoor tax that can surprise taxpayers. 

The estate tax is a little more complicated.  Dying this year just to avoid the estate tax does not seem to make a lot of sense to me. That said, the exclusion was $3.5 million in 2009.  In 2011, it will only be $1 million. More people will be subject to the estate tax as a result of this.  Therefore, everyone should make an appointment with their estate planning attorney.  Most married couples should consider a Credit Shelter Trust as part of their estate plan.

Are you concerned about these tax increases?  If so, what are you planning on doing about it?

Thomas F. Scanlon, CPA, CFP®

Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

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One comment on “Don't Look Now…Tax Rates are Headed Up!
  1. Great site. A lot of useful information here. I’m sending it to some friends!