Higher Tax Rates
As you have heard in recent news, beginning in 2011 the tax rates that were in effect prior to 2001 and 2003 will be restored if Congress does not extend the Bush Tax Cuts. These tax cuts included reductions in some individual income-tax rates, levies on capital gains and dividends, and changes to the estate tax, as well as relief from the marriage penalty. In all likelihood we believe that lawmakers will extend income-tax cuts that benefit families earning less than $250,000 a year, while allowing tax rate reductions for high-income earners to lapse. If that occurs, this will boost the top marginal rates from 33% and 35% to 36% and 39.6% respectively.
Increase in Capital Gains Rates
In 2011, the maximum long-term capital gains tax rate is set to go back up to 20 percent from 15 percent. A lower 10 percent tax rate is used by individuals who are in the 15 percent tax bracket; their long-term capital gains had been tax-free since 2008.
Increase in Dividend Income Tax Rates
Qualified dividends, which are generally paid from common stock, are currently taxed between 0 and 15 percent, will be taxed as ordinary income starting in 2011. For those individuals in higher income brackets, this income will then be taxed at yourhighest marginal tax rate.
Child Tax Credit
The credit of $1,000 per eligible child reverts to $500 after 2010. Additionally, the increased Earned Income Tax Credit for filers with three or more children and those in the higher income levels have been repealed.
WAYS TO PREPARE - SMART TAX STRATEGIES
If you own stock or a business and were thinking of selling it, because of the capital gains rate hike, if you cannot handle the 5 percent hike, then you may have a compelling reason to do so in 2010 rather than in 2011.
For those downsizing retirees selling their homes in 2011 and facing a large capital gains, you can still take either the $250,000 exclusion if you're single, or a $500,000 exclusion if you're married filing a joint return. However, if you have a gain beyond the applicable exclusion, you will also pay an extra 5% capital gain increase.
Maximize retirement-plan contributions. When tax rates rise, tax-deductible contributions and tax-deferred investment growth may become more valuable. Make the maximum retirement-plan contribution each year. Self-employed taxpayers in particular can set aside substantial sums on an annual basis to their retirement accounts (Keogh or SEP / Simplified Employee Pension Plans), with contribution limits of $49,000 for 2010. Taxes on those funds will be deferred until they are withdrawn during retirement.
If you're less than 50 years old, consider converting your traditional IRA to a Roth IRA. This allows those earnings to grow tax free for you. Starting in 2010, the income taxes due on a 2010 conversion can be spread over two years. Therefore, a 2010 conversion may be included as taxable income in 2011 and 2012, helping to spread out the tax hit.
Remember, poor planning equates to poor performance. This is the time to consult and strategize with your tax and financial advisors to outline a solid plan for your future.
Contact us for a consultation for a business analysis at 206-522-0110 or www.accountabilityservices.com.