Tax Law Changes for 2011: Are You Ready?

Posted on November 15, 2010

LATE BREAKING POST-ELECTION UPDATE:

I moved this piece from articles to the blog because its value is current and more need to be aware of it.  I subscribe to a Google alert on estate tax which has had hundreds of notifications of little substance in the last few months.  Friday on Opinion Journal Live, the video blog of the Wall Street Journal editorial page, Washington correspondent Steve Moore (who in my view has his reportorial viewpoint rooted in reality) reported that the prospective Democrat minority in the new Congress is open to some form of continuation of the current law regarding income tax.  They are wholly opposed to any elimination of the estate tax.  So, for the time being, I think the prudent path is to assume there will continue to be gridlock on the estate tax and we will have the $1 million limit in place for the foreseeable future.

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If ever there was a time to call your estate planning or tax attorney, now is that time.

The tax cuts instituted by the Bush administration in 2001 and 2003 are set to expire in 2011 unless Congress does something to stop it before the end of this year.  There are many proposed bills up for discussion right now but it’s anyone’s guess which, if any, will be passed in time.

If you are a single person earning $200,000 or more per year, or a married couple with a combined income of $250,000 plus per year, your federal payroll tax will increase by 0.9 percent in 2013 and taxes on your investment income and gains will take an additional hit of 3.8 percent.

To minimize the hit you’ll take next year, now is the best time to plan.  To give you an idea of what’s coming, here’s a brief list of the top 5 changes you’ll see after 2011:

1.         Increased Income Taxes for Higher Earners

Right now, single people with a taxable income of more than $192,000 and married couples who file jointly and have a combined taxable income of $232,950 or more pay 33 percent and 35 percent in taxes, respectively.  These taxes are going to increase to 36 percent.  If you earn more than $375,700 (regardless of whether you’re single or a couple filing jointly), your taxes will go up to 39.6 percent.  The general consensus is that the Bush tax cuts will probably become permanent for earners with incomes less than $200,000.

If you are looking at a higher tax rate in 2011, you need to look for ways to take advantage of the lower 2010 taxes now.  One possibility is conversion of a traditional IRA to a Roth IRA.  But don’t do this without talking to us first.  It needs to be done a certain way or it’s pointless.

2.         Higher Taxes on Investment Gains

If you’ve been enjoying a 15 percent maximum rate on long-term capital gains and qualified dividends, expect to see that increase.  If Congress takes no action, capital gains will be taxed at 20 percent and dividends will be treated as normal income (making rates as high as 39.6 percent a possibility).  More than likely, action will be taken to fix that hike to 20 percent, but only for investors in the top two income brackets we talked about earlier.  In 2013, that 20 percent rate will rise to 23.8 percent for the highest earners as part of the new excise tax for health care.

Don’t sell profitable stocks right now to qualify for a lower tax rate.  Just take this opportunity to rebalance your taxable investment portfolio now when the taxes are lower.  You should also take a look at your home equity situation and talk to us about actions you can take to lower your tax bill should you decide to sell and make a considerable profit.

3.         The Estate Tax Cometh

Yes, the federal estate tax will be resurrected in 2011 and it will come back at levels we saw in 2000.  The top tax rate will be 55 percent on estates worth $1 million to $10 million and 60 percent on estates worth more than $10 million.  Congress has said that they will fix the estate tax debacle and make estates valued at less than $3.5 million ($7 million for couples) exempt from federal estate taxes, and set a maximum tax of 45 percent on assets over that.  But no one is really sure how all this will play out.

Right now, we can only hope they take action soon.  But in the meantime, talk to us about how to structure your estate to take advantage of these exemptions should they happen, and make sure that your estate plan is sound.  For example, there are certain kinds of trusts that will essentially disinherit you if your spouse dies before the tax comes back.  Call us to make sure you don’t have a potential nightmare on your hands.

4.         You Could Be Losing Write-Offs

The 2011 budget will reinstate the phase-out of personal exemptions and itemized deductions for earners in the top two tax brackets.  Another proposal is on the table that will cap the deduction rate for the top two tax brackets at 28 percent.

The itemized deduction is still in effect for 2010 so this is a good year to make sizable gifts to your favorite charities.

5.         An Alternative Minimum Tax Quick Fix

If you’re a middle class taxpayer, you’re being hit every year by the Alternative Minimum Tax (“AMT”) because, although it was designed to make sure that rich taxpayers didn’t get out of paying taxes, it was never indexed for inflation.  Every time Congress passes what they call a one year “patch” to spare some taxpayers, they raise the AMT exemption.  A one year patch for 2010 is a given, and a permanent fix is possible in 2011 with an automatic annual inflation adjustment.  The AMT may be a joke but it’s a very profitable one – it will account for $875 billion between 2009 and 2019, so it’s likely to be a joke we’ll be living with for a very long time.

If you’re a single person with an adjusted gross income of $46,700 or more in 2009 or a married couple with an adjusted gross income of $70,950 for the same year, you will have to look at the tax tables and the AMT and pay whichever is higher.  This is really painful for couples with children in states where you’re also paying high income and property taxes (the deductions for these taxes are limited under the AMT).

These are only five of the changes that are coming in 2011.  The ins and outs of dealing with the tax code are murky on a good day, but with the coming year and the expiration of old tax breaks, the new health care legislation and the outcome of any pending legislation, you need to make sure that your tax house is in order and you’re not paying more than you need to pay.

Please contact me to discuss any of these items of concern.

One Response to “Tax Law Changes for 2011: Are You Ready?”

  1. Raul Benari
    Nov 16, 2010

    A thoughtful insight and ideas I will use on my blog. You’ve obviously spent a lot of time on this. Congratulations!