June 28, 2010
Income Tax Increase: Get Prepared
As we begin looking to 2011 and beyond for financial planning opportunities we see several significant changes in federal tax law that we thought you should know about and begin thinking about in relation to your planning. These changes are coming soon and they will affect most, if not all, taxpayers in one way or another.
First of all let's take a look at the proposed tax rate changes coming in 2011. These are the assumed rates based on a reversion to the old rates-pre-Bush tax cuts. Those tax cuts are set to expire at year's end. As of now there is no discussion to keep the current tax rates which means the 2011 projected tax rates presented below are more or less what we will be looking at in another 6 months.
Following are tables of tax rate changes from 2010 to 2011:
Marginal Income Tax Rates:
2010 Tax Rates:
Tax Bracket Married Filing Jointly Single
10% Bracket $0 - $16,750 $0 - $8,375
15% Bracket $16,750 - $68,000 $8,375 - $34,000
25% Bracket $68,000 - $137,300 $34,000 - $82,400
28% Bracket $137,300 - $209,250 $82,400 - $171,850
33% Bracket $209,250 - $373,650 $171,850 - $373,650
35% Bracket Over $373,650 Over $373,650
2011 Projected Tax Rates*:
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
*This is a reversion to the tax brackets pre-2001/2003 tax cuts. Those tax cuts are set to expire in 2010 but Congress can act to change these before year end. This table is a projection based on the expiration of rate cuts with a 3% inflation increase to the income thresholds. Notice the effect to middle and high income earners-not just the $200K plus earners.
Following are the changes to long term capital gains rates and taxes on qualified dividends:
2010 2011
Long-term Capital Gains Tax Rate: 15% 20%
Maximum Tax on Qualified Dividends: 15% 39.6%*
*Currently, 15% is the maximum tax levied on qualified dividends; in 2011 these dividends will be taxed at ordinary income rates. Refer to your tax bracket to determine at what rate you will be taxed.
Over the next three years taxes will increase to meet the demands of the reformed health-care system and the rising federal deficit. Strategic financial planning during this transition period is imperative if you want to minimize your total tax liability. These changes will touch nearly everyone, so addressing these now is the only way to mitigate future liabilities.
In 2013 there will be another round of tax increases in addition to these changes set for 2011. Included in these changes will be a 0.9% tax increase on wages for married couples earning over $250,000 and single taxpayers earning over $200,000. There will also be a new 3.8% tax on the investment income of these same couples and individuals with adjusted gross incomes in excess of $200,000 and $250,000 respectively. This 3.8% tax could apply to gains made on the sale of a home, as well as being very costly to certain trusts and estates.
Once you surpass the aforementioned barriers-which could be easily reached when selling assets such as a home-your investment income becomes taxable at the increased rate. One way to avoid a future increase in your tax liability may be to make a Roth IRA conversion. This would reduce future investment income, and withdrawals from them would not raise your Adjusted Gross Income.
A carefully planned tax strategy now may save you thousands of dollars in taxes in the future. These changes are coming quickly and we encourage you to take the time now to have a discussion with us about your situation. Please contact us to schedule a meeting to explore what best suits your situation. We can be reached by phone at (203) 967-2231, or by email at
advisors@thedowlinggroup.com. We look forward to hearing from you soon.
Sincerely,
Joseph M. Dowling, CPA
Sean M. Dowling,CFP, EA
President Vice President
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, this disclosure is intended to inform you that any tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
