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