While the November election produced significant gains for Republicans, the future of the Bush tax cuts is unlikely to be resolved any time soon. Newly elected officials who may have campaigned on the issue will not take office until January, and those still holding office are not likely to have the motivation or time to pass legislation extending the 2001 and 2003 tax cuts, which are scheduled to expire Dec. 31.
Virtually all taxpayers should plan for higher federal income taxes in early 2011. We anticipate that the Bush-era tax cuts will be allowed to expire. We expect Congress to revisit the issue in January, but would not be surprised if legislative changes are a long time in the making. We do expect any eventual changes to be made retroactive to the first of the year.
In addition to higher taxes, taxpayers should take steps in the near term to prepare for the following:
- Greater payroll tax withholdings that will have a direct impact on their take-home pay and bonuses.
- Tax rates on long-term capital gains of 10 to 20 percent, higher than the 0 to 15 percent for 2010.
- Tax rates on dividends of 15 to 39.6 percent as a result of this income no longer receiving preferential tax treatment.
- The return of the federal estate tax to its highest level in almost 10 years, with a top tax rate of 55 percent. The exemption level will revert back to $1 million from $3.5 million in 2009.
High net worth investors should also consider:
- Recognize capital gains in 2010: Given the possibility that all taxpayers are expected to face larger taxes on their capital gains as of Jan. 1, those already considering recognizing a gain in either 2010 or 2011 will find that this year is probably the better option.
- Accelerate income: Taxpayers who have control over the timing of their income, such as business owners and some executives, may benefit by accelerating income from 2011 into 2010, especially those in the higher tax brackets.
- Defer deductions: Taxpayers who are thinking about making charitable contributions or paying their property taxes near the end of this year may want to push those expenses into January 2011 to maximize the tax benefit.
