Upcoming Tax Increases To Keep In Mind

Regardless of how the elections turn out tonight, and barring any legislation before the end of the year, changes to our personal income taxes will automatically occur.  I’m sure everyone is aware of the increasing marginal tax rates, as well as the increased capital gains tax rates.  

I thought I would summarize some of the key changes that will automatically occur come January 1^st:

• Personal income tax rates will rise.  The top income tax rate will rise from 35% to 39.6%.  The lowest rate will rise from 10% to 15%.  The full list of marginal tax rate hikes is:

o   10% bracket rises to an expanded 15% bracket

o   25% bracket rises to 28%

o   28% bracket rises to 31%

o   33% bracket rises to 36%

o   35% bracket rises to 39.6%

• The “marriage penalty” (reflected in standard deductions and tax brackets for married couples that are less than double the single amounts) will return.  This change will cause many two-earner couples to owe more tax and may discourage couples from marrying.

• The capital gains tax will rise from 15% (0% for taxpayers in the current 10% and 15% tax rate brackets) this year to 20% in 2011.  

• The dividends tax will rise from 15% this year to potentially 39.6% in 2011 – dividends will be taxed at ordinary income tax rates.

• Itemized deductions and personal exemptions will again be phased out (no phase out limits for 2010), which has the same mathematical effect as higher marginal tax rates.

• The child tax credit will be cut in half from $1,000 per child to $500 per child.

• The dependent care credit will be calculated on $2,400 of expenditures (rather than $3,000) for one dependent and $4,800 (rather than $6,000) for two or more eligible dependents.

• Stepped up basis on inherited property returns along with a $1MM personal exemption and a top estate tax rate of 55% for estates over the $1MM level.

• The increased alternative minimum tax (AMT) exemption will expire, causing millions more taxpayers to owe AMT.

• The $250,000 immediate expensing of business equipment provision will be reduced to $25,000, and 50% bonus depreciation will expire.

The best plan is a proactive plan, so if any of the changes listed above could adversely affect you it’s best to address the issues now rather than trying to be reactive come January 1.  Any questions at all, just send me a message!