2010 and 2011 Income Tax Brackets – New Provisions and Expiring Bush Tax Cuts Plus Higher Capital Gains, Dividend and Estate Tax Rates
With tax season complete, it is now time to look forward and implement some smart tax management strategies to reduce your mitigate your tax liability for the years ahead. This is particularly the case with a number of new provisions and expiring tax breaks in 2010 and 2011. Based on these and extrapolating from 2010 IRS Tax Brackets I have provided my preliminary view of the 2011 income tax brackets.
Higher Tax Rates with Repeal of Bush Era Tax Cuts
Beginning in 2011, tax rates that were in effect prior to 2001 and 2003 will be restored if President Obama does not extend the Bush Tax Cuts. These tax cuts included reductions in some individual income-tax rates, levies on capital gains and dividends, changes to the estate tax and relief from the so- called marriage penalty, in which a married couple may pay more
in taxes than if they filed as separate individuals. The top income tax rate would go back to 39.6 percent, and the special low 10 percent bracket is eliminated.
Whether this actually happens will be a major point of contention in Congress especially in the contradictory light of the recession and record federal deficits. In all likelihood and based on stated views, it is likely that the Obama administration and Democratic lawmakers will extend income-tax cuts that benefit American families earning less than 0,000 a year, while allowing tax rate reductions for high-income earners to lapse. This means boosts in the top marginal rates from 33% and 35% to 36% and 39.6% respectively. Based on this and inflation, here is what the 2011 tax tables* could look like, with a comparison to the 2010 tax brackets.
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Some of the other key new and expiring tax provisions that you need to be aware of and mange include:
Increase in Capital Gains and Dividend Tax Rates – This is going to affect a number of Americans who saw their portfolio’s battered in 2008-2009. With the recovery in the last 6 months, it looks like Uncle Sam may come a calling for some of those stock market profits with tax rate reductions for long-term capital gains and dividends expiring this year. In 2011, the maximum long-term capital gains tax rate goes 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. In 2011, dividend income (other than capital gain distributions from mutual funds) is taxed as ordinary income at your highest marginal tax rate.
Estate Tax Revived – For individuals dying after 2010, the federal estate tax returns with a ,000,000 exemption and a 50 percent maximum rate. Congress is likely to take some action on these rules during 2010 with a likely exemption of at least .5 million, and it could be set as high as million if the Senate prevails. Estate tax legislation will include spousal transfers, making the exemption million or more for couples. The estate tax rate will be capped at 45%, the same as it is now. While there are likely to be more easings for the alternative minimum tax, there will be no repeal.
Child Tax Credit – The credit of ,000 per eligible child reverts to 0 after 2010. After 2010, none of the child tax credit will be refundable to taxpayers unless their earned income is more than ,550. This is one of the many Bush tax cuts currently scheduled to expire after 2010. Further temporary increases in the Earned Income Tax Credit for filers with three or more children and the higher income levels for the phaseout of the credit are repealed.
Despite a rising tax environment there are some ways to preparing for the upcoming income tax changes. Here are some smart tax strategies to consider:
- Maximize retirement-plan contributions. You should also consider your retirement accounts in any assessment of your tax strategy. When rates rise, tax-deductible contributions and tax-deferred investment growth can become more valuable. But although it’s true that tax deductions will be worth even more if tax rates move higher, there’s no need to postpone them; it still makes sense to continue making the maximum retirement-plan contribution each year. Self-employed taxpayers in particular can set aside substantial sums annually in Keogh or simplified employee pension (SEP) accounts, with contribution limits of ,000 for 2009. Taxes on those funds will be deferred until they are withdrawn during retirement.
I am a personal finance junkie and my blog www.savingtoinvest.com is the main channel through which I share my thoughts/views and hopefully add some value to my readers. I have completed nearly one year of writing on my blog and during that time I have learnt so much, interacted with hundreds of other bloggers and even made a few bucks along the way. It has truly exceeded all my expectations ~ Andy