Greetings!
Isaacson Isaacson Sheridan & Fountain, LLP sends out periodic emails with news and updates about legal issues and about our firm. We hope you find this information useful. If you prefer not to receive these emails, please click on SafeUnsubscribe below. Of course, please email or call us if you would like to discuss any of these matters.
Even If Congress Does Nothing, Income Tax Laws Will Change
Tax planning is always a challenge, but this year it's especially difficult. Even if Congress makes no changes at all, the federal income tax landscape will change next year under automatic sunset provisions in the 2001 Tax Act. The President's FY 2011 budget proposals include many revenue raising proposals, some of which adopt or modify 2001 Tax Act automatic sunsets. Thus, there will be changes regardless of whether or not there is new legislation.
Tax rate structure. Under current tax rules, the first slice of taxable income is taxed at 10%, and the second slice at 15%. The size of the 15% tax bracket for married taxpayers filing joint returns (and qualified surviving spouses) is twice the 15% tax bracket for individual filers. The top four tax brackets are 25%, 28%, 33%, and 35%.
Beginning in 2011, if Congress doesn't make changes, the following rules automatically will be in place under the 2001 Tax Act sunset rule:
· The first slice of taxable income will be taxed at 15%; in other words, the bottom 10% bracket will disappear.
· The size of the 15% tax bracket for married taxpayers filing joint returns (and qualified surviving spouses) will be 167% of the 15% tax bracket for individual filers.
· The top four brackets will be 28%, 31%, 36%, and 39.6%.
Under the Administration's FY 2011 budget proposals, these rules would apply beginning in 2011:
1. The bottom four brackets would remain at 10%, 15%, 25%, and 28%. The size of the 15% tax bracket for married taxpayers filing joint returns would continue to be twice the 15% tax bracket for individual filers, and the 28% bracket would be expanded to assure that taxpayers won't see their taxes rise as a result of the increase in the top two brackets (see below).
2. The top two brackets (currently 33% and 35%) would rise to 36% and 39.6%.
3. For married taxpayers filing jointly, the 36% rate would apply to taxable income above $250,000 less the standard deduction and two personal exemptions, indexed from 2009; and for single taxpayers it would apply to taxable income above $200,000 less the standard deduction and one personal exemption, indexed from 2009.
If there are no inflation adjustments the 36% rate would start at taxable income of $231,300 for married taxpayers filing jointly ($250,000 − $11,400 standard deduction − $7,300 for two personal exemptions) and at $190,650 for single taxpayers ($200,000 − $5,700 standard deduction − $3,650 personal exemption).
4. The 39.6% bracket would apply to taxable incomes over $373,650 for married taxpayers filing jointly, heads of household and single filers, with the taxable income level indexed for inflation for 2011 and subsequent years.
Comment: The Administration's proposal would make tax rates look much like pre-2001 rates for incomes over $250,000. Incomes under $250,000 would still get one benefit of the 2001 cuts. If nothing happens, almost everyone's rate will increase.
Taxation of capital gains and qualified dividends. Under current rules, most long-term capital gain is taxed at a maximum rate of 15%. If the long-term capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a zero percent rate. Qualified dividends are taxed to noncorporate shareholders at the same rates that apply to long-term capital gain.
Beginning in 2011, if Congress doesn't make changes, long-term capital gains will be taxed at 20%. Additionally, dividends paid to individuals will be taxed at the same rates that apply to ordinary income.
Under the Administration's proposals, beginning in 2011, a 20% tax rate would apply to long-term capital gains and qualified dividends of married taxpayers filing jointly with income over $250,000 less the standard deduction and two personal exemptions (indexed from 2009) and for single taxpayers with income over $200,000 less the standard deduction and one personal exemption (indexed from 2009). Taxpayers below these income levels would be subject to the rates that currently apply (i.e., 0% or 15% rate) to long term capital gains and qualified dividends.
Deductions. Under current rules, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) is 200% of the standard deduction for single taxpayers. For 2010, higher-income taxpayers don't face reduction of itemized deductions, or phaseout of personal exemptions.
Beginning in 2011, if Congress doesn't act, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) will be 167% of the standard deduction for single taxpayers. A higher-income taxpayer's itemized deductions (except for deductions for medical expenses, investment interest, casualty, theft or wagering losses) will be reduced by 3% above an inflation-adjusted figure, but deductions won't be reduced by more than 80%. Also, a higher-income taxpayer's personal exemptions will be phased out when adjusted gross income exceeds an inflation-adjusted threshold.
| 
