2011 Tax hikes are coming !

Hey fun people…. 

Lets take a look at what’s going to be happening tax wise in a few months from now.

Income tax bracket changes for 2011

In case you weren’t aware, the Bush tax cuts of 2001 and 2003 are set to expire at the end of 2010. Thus, if Congress doesn’t act, the relatively low income tax rates that we’ve been enjoying (hah! enjoying?) will soon be a thing of the past. They will be replaced by the pre-2001 tax brackets.

In other words, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets that we’ve grown accustomed to will be replaced by 15%, 28%, 31%, 36%, and 39.6% brackets. It’s hard to say exactly where the income cutoffs will lie, but if we base the numbers on the 2010 income tax brackets and add 3% for inflation, the 2011 tax brackets might look something like this:

Tax Bracket

Married Filing Jointly

Single

15% Bracket

$0 – $70,040

$0 – $35,020 

28% Bracket

$70,040 – $141,419

$35,020 – $84,872 

31% Bracket

$141,419 – $215,528

$84,872 – $177,006

36% Bracket

$215,528 – $384,860

$177,006 – $384,860 

39.6% Bracket

Over $384,860

Over $384,860

Capital gains tax changes in 2011

Beyond the increased federal income tax brackets, the capital gains tax rates will also be changing (and not for the better). The top rate for long-term capital gains will be rising from 15% to 20%, and the 0% rate for those in the lowest tax brackets will be replaced by a 10% long-term capital gains rate.

Why worry about 2011 income tax changes?

Since the 2011 tax year is so far off, you might be wondering why we’re even talking about it right now. Well, as I noted above, the time to being planning for things like this is right now – before the changes go into effect as these potential income tax rates have the potential to take a big bite out of your savings account.

What sort of planning should you be doing? I can think of several things off the top of my head. For starters, if you’re in a position to accelerate income from 2011 into 2010, you might want to do so. In many cases this is easier said than done, but it’s worth exploring if you’d like to shield your income from the potentially higher rates.

Also, if you’re anything like me, you may wait until the end of the year to make your charitable donations. If so, then by waiting just a few more days (until January 1, 2011) to write that check, you could net a substantial tax savings. While you’d have to wait longer to claim the deduction, it might be worth it.

Similarly, if you anticipate selling investments to generate cash during 2011, you might consider moving that up to the end of 2010 to get in on the (presumably) lower capital gains tax rates.

ESTATE TAX RETURNS in 2011 with a VENGEANCE !

The federal estate tax is scheduled to return with a vengeance on Jan. 1, 2011, imposing a levy of up to 55% on estates valued at more than $1 million. And the same congressional paralysis that allowed the tax to expire in 2010 could thwart efforts to pare it back, estate planning attorneys say.

A $1 million exemption would affect a lot of families that are not even aware that they fall into that category . You start adding up the value of a home, an IRA or 401(k) retirement account, and lets not forget the value of your family business and some other savings and you get to $1 million pretty easily. 

So what does this mean to us….

Unless Congress acts, the federal estate tax, which was repealed this year, will return in 2011 with a lower exemption and a higher tax rate. This table shows the tax liability for a $5 million taxable estate, based on the year of death:

Year

Tax liability

2009

$675,000

2010

$0

2011

$2.0 million

Source: Deloitte Tax and Nickle

Tell next time

Have a great day and a profitable week !!!