In 2001, the Bush Administration issued tax cuts for all American taxpayers that reduced rates on income, capital gains, and dividends. These cuts are set to expire in 2010 and taxpayers may be surprised to lose the benefits of these cuts. If these credits are allowed to expire, the lowest tax bracket would jump from 10% to 15% income tax, which equates to a 50% tax increase in taxes for the lowest levels. For those in the highest tax bracket, rates would increase from 35% to 39.6% income tax - an increase of slightly more than 10%. Currently the top two tax rates are 33% and 35%, but they expire after December 31, 2010. Current proposals reinstate the 36% and 39.6% rates in 2010. The potential exists that Congress can make these moves retroactive to January 1, 2010. So, if you are higher income individual, you need to look at ways to accelerate income into the current year to protect your risk.

Congress may choose to extend or make these cuts permanently, but without an increase in income taxes, it would be impossible to support the planned health care reforms that have garnered so much attention lately. There is little doubt these cuts will be allowed to expire. It's estimated that the tax cuts are costing the government $1 to $2 trillion, which is the cost of planned health care reforms.

What does it all mean?

In general, if these tax reductions expire, everyone will be affected. The decision has yet to be made whether these tax cuts will be renewed or expire as planned. 2010 will be a year of major uncertainty. Please consult with us and your financial planner/estate planner throughout the year to ensure that you are minimizing your tax liabilities!

The Worker, Homeownership, and Business Assistance Act of 2009 extended the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. If a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase and receive the $8,000 tax credit. A first-time homebuyer is a buyer who has not owned a primary residence during the three years up to the date of purchase.

The law also provides a "long-time resident" credit of up to $6,500 to others who do not qualify as "first-time homebuyers." To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.

  The 2001 tax cut increased the child tax
  credit to $1,000, which was a refundable
  amount so it was available to those who did
  not even have a tax liability. In 2010, the
  child tax credit will be reduced to a
  maximum of $500 per child.

This tax is placed on large inheritances and estates that are inherited after a death. This tax would only affect estates that are valued over $1 million, but this could include family businesses, properties, or farms. Over the past years, the Estate Tax exemption has gradually increased as the tax level decreased. In 2010, the entire tax levy disappears; when the tax cuts expire at the end of 2010, the taxes come back in full force on estates over $1 million at a tax rate of 55%. If you are affected by this change, talk to your financial advisor. If you don't have one, we can provide recommendations for you.

  With the expiration of the current tax credit,
  the capital gains tax will increase from 8%
  to 10% for those in the lowest tax bracket.
  Even worse, all others will have a tax
  of 20% on all capital gains! Look at year-
  end trades (tax harvesting) as a method to
  manage your liability from any gain.

 
- Maco & Associates