Planning For Potential Tax Changes

Most of us have just finished filing our 2009 tax returns, still there’s no time to take a break from preparing for future tax filings. In fact you may want skip 2010 and start getting ready for 2011 when the current tax rates are set to expire.

Tax cuts enacted in 2001 and 2003 by then President Bush are set to expire by the end of 2010. If Congress fails to act before then, income tax rates will increase to their former levels. To date Congress has said much, but done nothing.

It’s anyone’s guess as to what action Congress will finally take. A complete overhaul of the tax code is unlikely, but lawmakers are likely to increase taxes for high wage earners. Planning ahead can help you be prepared for potential tax expenses and implement strategies that work best for your situation.

The current top tax rates of 33% and 35% will probably climb to the 36% and 39.6% percent levels they were prior to the tax cuts. The 36% rate would likely apply to single filers with income above $192,000 and joint filers with income above $232,950. The 39.6% rate will apply to single or joint filers above $375,700. If you face the potential of higher taxes in 2011, you may want to reverse the norm of deferring income until the following year.

Taxes on capital gains and dividends are also expected to increase in 2011. Currently, investors are paying a maximum rate of 15% on long-term capital gains and qualified dividends. If Congress fails to act, capital gains would be taxed at 20% in 2011. Dividends would be treated as ordinary income. If you are in the 36%+ high wage bracket, you may want to consider rebalancing portions of your portfolio that have tax implications during 2010.

The inability of Congress to put tax legislation in place in a timely matter has created one of the best or worst situations for estate tax. Currently, the federal estate tax stands at zero. Taxpayers view of whether this is good or bad depends largely on whether or not they die during 2010. Once 2011 is rung in, the estate tax rates will skyrocket to 55% on estates of $1 million to $10 million and 60% for those over the $10 million mark.

Complicating matters further for those who have formula clauses in their wills and/or trust documents, which include a marital trust or a residuary trust. Given the uncertainty, it is important to review the documents and give serious consideration as to whether or not the formulas will still work in the current tax environment.

Our intent is not to offer tax or legal advice. As always, the advisors at FMA will work closely with your accountant and attorney to provide you with a comprehensive wealth management team.