Watch Out: Expiring Tax Rates and Breaks

Tip of the Week | September 22, 2010 | No. 9

Watch Out:  Expiring Tax Rates and Breaks

Without action by Congress by Dec. 31, 2010, lots of tax rates and breaks expire.

Capital gains taxes will revert to the levels of the 1990s.  Capital gains taxes on long term capital gains will go from 15% Federal to 20% or more Federal; taxes on dividends, currently at 15% Federal, will potentially go to the individual’s ordinary income tax marginal bracket as high as 39.6%.
Strategy:  If you have highly appreciated stock or land, 15% Federal tax may be the lowest rate you may see for a while; consider selling in 2010 rather than 2011 only after checking alternative minimum tax and all other tax ramifications of your situation.
Strategy:  Consider keeping dividend-paying stocks in tax qualified vehicles like IRAs or qualified pension and profit sharing plans until the tax law becomes clearer later this year or early next.  Consider growth stocks versus dividend paying stocks if you feel taxes are going up.

Taxes on ordinary earned income, with no action by Congress by December 31st, or soon thereafter, would rise for all taxpayers as the Bush tax cuts expire.  Current proposals by the White House and Congress have the top 2 tax brackets rise from 33% to 36% and 35% to 39.6% respectively.

Estate taxes will skyrocket.  Starting in 2011, all taxable estates $1 Million and over in value would be taxed up to 55%; in 2010, there is no federal estate tax.

My best guess:
Congress is unlikely to get tax legislation accomplished by the elections, with a last-minute compromise by parties involved.  And, I wouldn’t rule out last-minute compromises.  Progress after November 2, 2010 is more likely.  But, tax planning in November and December 2010 will be important.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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