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Tax Update & Planning for 2010
Updates as of 26OCT2010-IRS just released tax rates for 2010- No definitive news yet as regards extension of 2001 tax act provisions; still scheduled to expire on 01/01/2011.
In 2001 the U.S. 107th Congress established changes to the income tax laws intended to stimulate the economy. In order to get this tax legislation passed, the provisions of this 2001 tax act contained what is referred to as a “sunset” provision, meaning that unless a future Congress extended the tax provisions, including the new marginal tax bracket rates, the law would revert to where it was prior to the 2001 tax changes.
So far, no U.S. Congress, including the existing 111th Congress has yet to either change of otherwise extend the provisions of the 2001 tax act, including the marginal personal tax provisions. This leaves a significant amount of uncertainty as regards tax planning for 2011, and given the hardships of the U.S. and global economy combined with anticipated changes in the 112th Congress based on the 2010 midterm elections, it is impossible to predict at this time what changes to tax legislation will, if any, be made either before the end of 2010 or early in 2011, retroactive to the first of the year.
Tax “experts” have been anticipating that the 111th Congress will make a last minute “extension” of the 2001 tax provisions before the end of the 2010 year, at least until anticipated changes can be studied.
Under existing tax law U.S. individuals have six (6) marginal tax brackets (%, 15%, 25%, 28%, 33% and 35%), with each of the six percentages being applicable based on the filing status of the individual. Unless the 2001 tax law is extended, the number of marginal rate brackets will revert to 5 (15%, 28%, 31%, 36%, and 39.6%) with each rate being applied at a much lesser income bracket range.
The IRS has just released the 2010 marginal tax brackets:
10% on income between $0 and $8,375
15% on the income between $8,375 and $34,000; plus $837.50
25% on the income between $34,000 and $82,400; plus $4,681.25
28% on the income between $82,400 and $171,850; plus $16,781.25
33% on the income between $171,850 and $373,650; plus $41,827.25
35% on the income over $373,650; plus $108,421.25
Married Filing Jointly or Qualifying Widow(er) Filing Status
10% on the income between $0 and $16,750
15% on the income between $16,750 and $68,000; plus $1,675
25% on the income between $68,000 and $137,300; plus $9,362.50
28% on the income between $137,300 and $209,250; plus $26,687.50
33% on the income between $209,250 and $373,650; plus $46,833.50
35% on the income over $373,650; plus $101,085.50
Married Filing Separately Filing Status
10% on the income between $0 and $8,375
15% on the income between $8,375 and $34,000; plus $837.50
25% on the income between $34,000 and $68,650; plus $4,681.25
28% on the income between $68,650 and $104,625; plus $13,343.75
33% on the income between $104,625 and $186,825; plus $23,416.75
35% on the income over $186,825; plus $50,542.75
Head of Household Filing Status
10% on the income between $0 and $11,950
15% on the income between $11,950 and $45,550; plus $1,195
25% on the income between $45,550 and $117,650; plus $6,235
28% on the income between $117,650 and $190,550; plus $24,260
33% on the income between $190,550 and $373,650; plus $44,672
35% on the income over $373,650; plus $105,095
Estimated Income tax brackets for 2011 as adjusted for inflation
The following is an estimate of how the 2011 tax brackets may look for 2011 unless either the 2001 tax legislation is continued or changes are made:
15% on income between $0 and $35,020
28% on the income between $35,020 and $84,872; plus $5,253
31% on the income between $84,872 and $177,006; plus $19,212
36% on the income between $177,006 and $374,860; plus $47,773
39.6% on the income over $384,860; plus $122,601
Married Filing Jointly or Qualifying Widow(er)
15% on income between $0 and $70,040
28% on the income between $70,040 and $141,419; plus $10,506
31% on the income between $141,419 and $215,528; plus $30,492
36% on the income between $215,528 and $384,860; plus $53,466
39.6% on the income over $374,860; plus $114,425
As I predicted when the Economic Growth and Tax Relief Reconciliation Act of 2001 (the so called “Bush tax cuts”) were legislated, tax planning would be a nightmare in 2010. The reason is that the tax provisions passed by Congress were legislated as part of a bi-partisan reconciliation legislation that had a built in “sunset” provision, meaning that the law was temporary and effective January 1, 2011 that tax rates and provisions affected by the legislation would expire and return to their status prior to this legislation. Any extension or permanency was left to future Congressional action.
Between bailouts and other economic stimulus legislation, health care reform, cap and trade, etc. Congress, in their spare time, has been considering changes in tax legislation that it deemed appropriate. Although several legislative changes have been enacted or proposed and are likely to take effect January 1, 2011, the “Bush tax cuts” are in limbo, for political reasons. Although many of the 2001 Tax Act provisions lowered income taxes paid by corporations and more affluent individuals, the Act also reduced income tax rates on the lowest tax brackets and middle income families and individuals, as well as reducing the tax paid on investment income such as dividends and capital gains which is integral to the average middle income taxpayer’s saving strategy. Thus, although there is a lot of finger pointing in Congress these days, the fact is that it is politically unwise to even consider proposing legislation that could possibly be viewed as increasing taxes for lower or middle income taxpayers until after the November elections. That leaves us with two possibilities, either tax legislation will be rammed through by a lame duck Congress immediately after the election (resulting in a myriad of unintended results and confusion as we saw in 1977 and 1978) or a temporary extension of the 2001 tax laws will be enacted, leaving it up to those sitting in Congress to deal with in 2011. Many experts are predicting the latter, stating that there simply won’t be sufficient time to enact new tax legislation in 2010 to be effective January 1, 2011. This would most likely leave us with tax legislation passed in 2011 with an effective date being the date of enactment of the new tax statutes or said another way, a year where different tax laws applied to different dates during the year.
TAX PLANNING OPTIONS FOR 2010?
So as far as year end planning for your taxes, we are left in limbo and this can prove to be extremely costly. Let’s say that you had an opportunity to accelerate income into 2010 or defer deductions to 2011, absent the constructive receipt doctrine. If it were absolutely certain that tax brackets were going to increase effective January 1, 2011 then it may make good economic sense to accelerate income into 2010 and pay a lesser tax on the income; however if the effective date of any tax rate increase were to become effective at some later date either in 2011 or 2012, such a strategy would not make sense as it would mean the lost opportunity costs of having the use of the money. So for now at least, alternatives need to be considered in light of both possibilities with decisions and action postponed until the end of 2010. Although unfair to :we-the people” this is all about Democrat Congress seeking to make a campaign issue stressing that GOP support for changes intended to lower taxes on lower income persons is opposed by the GOP while stressing that the GOP insists on preserving tax legislation that is “perceived” as benefiting upper income taxpayers. I don’t know about you, but most low income persons pay no or very little income tax and this tax legislation affecting these taxpayers would have little or no affect on their personal disposable income or do anything to stimulate the economy. On the contrary, the majority of taxpayers, the so called “middle class” would suffer as these are the majority of the U.S. taxpayers and any increase in tax would definitely have an adverse affect on their disposable income and spending, thus will adversely affect the economy.
TAX CHANGES FOR 2010
So far, this is what we do know regarding changes in tax legislation for 2010 and future years.
I would like to add my personal opinion to the concept of another tax overhaul and especially the repeal of the Section 911 exclusion.
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