When the various Bush tax cuts were put into place, many affecting individual investors were scheduled to expire in 2010 and 2011. Similarly, the Obama stimulus package tax cuts were mostly one-shot affairs, only affecting 2009. As a result, unless Congress acts soon, there will be some very nasty surprises in the near future.
Tax Rates
2010 is scheduled to be the last year with a top tax bracket of 35 percent. Beginning next year, that bracket is to rise to 39.6 percent, where it had been ten years ago. The lower brackets will increase as well, adversely affecting all taxpayers.
Your tax bill could also rise in other ways. Congress has proven itself adept at raising taxes without raising tax rates. For the past couple of decades, many investors deemed to be at upper income levels (essentially, six figures) had had their itemized deductions and exemption amounts cut back. The more income, the greater the cutback. For the past few years, that cutback had itself been reduced—for this year, it is eliminated. The cutbacks are due to be reinstated in full next year, effectively increasing the income subject to those higher marginal rates.
Then there’s the Alternative Minimum Tax. Instituted 25 years ago to prevent the wealthy from avoiding taxes altogether, the AMT has not been adjusted for inflation. As a result, it mostly affects those earning in the lower six figures. For years, Congress has enacted an annual patch, to avoid the AMT’s impact on even more middle class taxpayers. Every year, the patch is less effective and in any event is no substitute for a long overdue AMT reform. Bottom line: if Congress doesn’t do something, AMT will just get worse.
But wait, there’s more! For the past several years, the maximum capital gains rate on securities owned more than one year was limited to 15 percent. The maximum rate on qualified dividends was the same. Both those limits also expire at the end of this year. The capital gains rate is scheduled to rise to 20 percent—with a little-noticed, 18 percent rate for securities bought after 2000 and held at least five years. Worse, the rate on dividends reverts to the ordinary income rate—potentially taxable at as much as 39.6 percent. That’s more than double the current limit.
Retirement Plan Distributions
Last year’s one-year reprieve from taking minimum required distributions from IRAs and other retirement plans was just that—a onetime event. As of now, MRDs are required for this year.
Similarly, the ability to direct your MRD to charity, thus excluding it from your income, has also expired. The charitable rule was in place last year, but the MRD moratorium took it off the table for most investors. Expect to see the drums beating for a reinstatement of that charitable rule, if not for a second year of waiver. Until then, retirees who do not require distributions to support themselves would be well advised to take a wait and see attitude as regards their MRDs.
Estate Taxes
Expect estate taxes to be the first big battle of 2010. Under the Bush tax cuts, the federal estate tax was scheduled to disappear this year—and only this year. The plan had been for the amount exempt from estate tax—which had climbed to $3.5 million last year—to drop back down to its 2001 level of $1 million next year.
As if this wasn’t enough of a whipsaw, the one year estate tax exemption has a little-noticed dark side. Traditionally, when someone dies, all of his assets get a new cost basis—the date of death value. As passed by Congress, there is no basis step-up for decedents dying this year. If your Grandparents refused to sell their low basis stock because of the tax bill, figuring you would get a new basis at their death, you may well simply inherit their headache along with their basis. This rule is to apply regardless of the size of the estate, so it affects those that would not have been taxed in any event.
Politically, Congress will have to find a way for this not to happen. The no basis step-up rule was tried once before, from 1976-78, and it was a disaster. After a decade of ever-increasing estate tax exemption amounts, taxpayers will not sit still for that exemption dropping back to $1 million. As of late December 2009, Congress was attempting to pass a one-year extension of the $3.5 million exemption. Buzz among estate tax professionals is that it will eventually be made permanent. “Eventually” may not be soon enough those passing away early this year.
Email the author at [email protected].
Tax Rates
2010 is scheduled to be the last year with a top tax bracket of 35 percent. Beginning next year, that bracket is to rise to 39.6 percent, where it had been ten years ago. The lower brackets will increase as well, adversely affecting all taxpayers.
Your tax bill could also rise in other ways. Congress has proven itself adept at raising taxes without raising tax rates. For the past couple of decades, many investors deemed to be at upper income levels (essentially, six figures) had had their itemized deductions and exemption amounts cut back. The more income, the greater the cutback. For the past few years, that cutback had itself been reduced—for this year, it is eliminated. The cutbacks are due to be reinstated in full next year, effectively increasing the income subject to those higher marginal rates.
Then there’s the Alternative Minimum Tax. Instituted 25 years ago to prevent the wealthy from avoiding taxes altogether, the AMT has not been adjusted for inflation. As a result, it mostly affects those earning in the lower six figures. For years, Congress has enacted an annual patch, to avoid the AMT’s impact on even more middle class taxpayers. Every year, the patch is less effective and in any event is no substitute for a long overdue AMT reform. Bottom line: if Congress doesn’t do something, AMT will just get worse.
But wait, there’s more! For the past several years, the maximum capital gains rate on securities owned more than one year was limited to 15 percent. The maximum rate on qualified dividends was the same. Both those limits also expire at the end of this year. The capital gains rate is scheduled to rise to 20 percent—with a little-noticed, 18 percent rate for securities bought after 2000 and held at least five years. Worse, the rate on dividends reverts to the ordinary income rate—potentially taxable at as much as 39.6 percent. That’s more than double the current limit.
Retirement Plan Distributions
Last year’s one-year reprieve from taking minimum required distributions from IRAs and other retirement plans was just that—a onetime event. As of now, MRDs are required for this year.
Similarly, the ability to direct your MRD to charity, thus excluding it from your income, has also expired. The charitable rule was in place last year, but the MRD moratorium took it off the table for most investors. Expect to see the drums beating for a reinstatement of that charitable rule, if not for a second year of waiver. Until then, retirees who do not require distributions to support themselves would be well advised to take a wait and see attitude as regards their MRDs.
Estate Taxes
Expect estate taxes to be the first big battle of 2010. Under the Bush tax cuts, the federal estate tax was scheduled to disappear this year—and only this year. The plan had been for the amount exempt from estate tax—which had climbed to $3.5 million last year—to drop back down to its 2001 level of $1 million next year.
As if this wasn’t enough of a whipsaw, the one year estate tax exemption has a little-noticed dark side. Traditionally, when someone dies, all of his assets get a new cost basis—the date of death value. As passed by Congress, there is no basis step-up for decedents dying this year. If your Grandparents refused to sell their low basis stock because of the tax bill, figuring you would get a new basis at their death, you may well simply inherit their headache along with their basis. This rule is to apply regardless of the size of the estate, so it affects those that would not have been taxed in any event.
Politically, Congress will have to find a way for this not to happen. The no basis step-up rule was tried once before, from 1976-78, and it was a disaster. After a decade of ever-increasing estate tax exemption amounts, taxpayers will not sit still for that exemption dropping back to $1 million. As of late December 2009, Congress was attempting to pass a one-year extension of the $3.5 million exemption. Buzz among estate tax professionals is that it will eventually be made permanent. “Eventually” may not be soon enough those passing away early this year.
Email the author at [email protected].
