More than a tax rate increase coming in 2011
Congress recently adjourned without addressing the automatic expiration of numerous tax reductions that were enacted in 2001 and 2003.
What has received the most attention is the increase in the tax rates. The following chart shows the changes which will occur if Congress does not pass legislation before year end and the percentage increase:
Current Tax Rate - Rate Effective 1/1/11 - Percentage Increase
10.0% 15.0% 50.00% 25.0% 28.0% 12.00% 28.0% 31.0% 10.71% 33.0% 36.0% 9.09% 35.0% 39.6% 13.14%
In addition to rate increases, several other provisions are also set to revert back to 2001 or 2003 law.
• Marriage Penalty: The adjustment of tax brackets and standard deductions to bring relief to the “marriage penalty” will expire, bringing the penalty back. This will cause married, two-earner couples to pay more tax and may discourage couples from getting married.
• Capital Gains: The capital gains tax will rise from 15 percent to 20 percent in 2011 for most taxpayers. The tax rate on qualifying dividends will change from 15 percent to the taxpayer’s highest marginal tax rate which could be 39.6 percent.
• Child Tax Credit: The child tax credit will drop from $1,000 to $500 per child.
• Dependent Care Credit: The dependent care credit will be calculated on $2,400 of expenses, down from $3,000 for one dependent and $4,800 for two, as opposed to the current level of $6,000 for two or more dependents.
• Estate Tax: While the stepped-up basis rules on property passing due to a death is reinstated, so is the top estate tax rate of 55% and the $1,000,000 filing threshold.
• AMT: The increased alternative minimum tax exemption will expire, causing millions of additional taxpayers to be subject to alternative minimum tax.
On a positive note, Congress and the President did recently act to improve tax benefits for Small Businesses by passing the Small Business Jobs Act of 2010 that include several tax provisions, including depreciation for business equipment. The $250,000 immediate expensing of business equipment, “Section 179” has been increased to $500,000 for 2010 and 2011. These amounts had been scheduled to revert to $25,000.
Many experts felt Congress would not allow the estate tax to expire at the beginning of 2010, but they have been proven wrong, thus far. What additional changes to the tax provisions, which are set to expire at the end of this year, Congress will rescue when they return in November is anyone’s guess. Your tax advisor can counsel you on how the changes may affect you and how you can best be prepared.
Michael McCarthy, CPA, CFP, MST, is a director with Wright Griffin Davis and Co.