Year End Tax Planning: Cloud of Uncertainty Continues

November 18, 2010

There is currently a great deal of uncertainty about what the income tax rates will be for 2011. After the Democrats' huge losses in Congress there is much conversation that the President may be willing to compromise on a temporary extension of tax cuts. Democrats and Republicans seem to agree on an extension of lower rates for individuals earning less than $200,000 but disagree on whether to extend those rates for the highest earners.

Under current sunset rules, virtually everyone will be subject to higher rates next year. The 39.6% top federal rate applicable to ordinary income is set to be reinstated, with the long-term capital gain rate returning to 20%. Furthermore, without new legislation, qualified dividends, currently taxed at 15%, would be taxed at rates up to 39.6%. Congress may enact legislation to permit the 2010 income tax rate structure to remain in place for 2011, allow the currently scheduled 2011 increases to become effective by doing nothing, or enact higher rates for "higher income individuals." This uncertain state of affairs creates a quandary about year-end income tax planning. Consequently, it is important to focus not only on last minute opportunities for 2010, but also on positioning for 2011 and beyond. An additional 0.9% tax on earned income and 3.8% tax on unearned income are scheduled to take effect in 2013 for high income taxpayers. We are hopeful Congress, by year end, will resolve the uncertainties about income tax rates as of this writing, and the status of the federal estate tax including post 2010 exemption amounts and rates. As always, we will keep you informed on important developments.

Click here to view the full-length year-end tax planning guide.

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