One of the most pressing tax planning questions is where are tax rates heading for the year 2011? Because at the end of 2010, all of the tax breaks implemented under President George W. Bush will expire. Among a host of changes, tax rates will revert to their pre-2001 levels, roughly as follows:
| 2010 | 2011 |
| 10% | |
| 15% | 15% |
| 25% | 28% |
| 28% | 31% |
| 33% | 36% |
| 35% | 39.6% |
Absent any new tax legislation addressing the expiring tax breaks, the 10% tax bracket will be eliminated and collapsed into the 15% bracket; the 25, 28, and 33 percent brackets will be bumped up three percentage points each, and the top 35% rate will rise to 39.6%. The tax rate on long-term capital gains would increase as well, from 15% currently to 20%.
President Obama has proposed to keep the 10% through 28% brackets and to allow the top two tax brackets to increase to 36% and 39.6%, respectively. There's a wide range of other expiring tax breaks, which are nicely summarized over at Forbes.
The question then becomes how much will these changes impact your particular tax situation? The Tax Foundation has published a Web-based calculator at MyTaxBurden.org that will estimate the potential tax impact of the expiring tax provisions. Like all tax calculators, this particular application contains a number of assumptions necessary to keep the calculator relatively simple to use. Most importantly, the Tax Foundation's calculator assumes that Congress will revise the alternative minimum tax exemption amounts to be in-line with 2009 exemption levels.
Personally I found the calculator to be easy to use, but not quite so easy to figure out what the main factors are. However by altering my inputs (for capital gains or deductions) I was able to see how changes to limitations on itemized deductions or capital gains tax rates might impact a tax scenario.
I encourage you to play around with the calculator. It's a very illuminating way to see exactly how policy decisions in Washington could affect your pocketbook.
Awesome Post William!
This is bound to, and I can’t wait, get a lot of public debate.
Thank You!
Please, please, please take the information you get from the tax calculator to a tax professional for evaluation. There are many factors that influence a favorable tax situation that may not be reflected in the tax calculators. A tax professional that is proficient in tax planning will be able to point out manny areas of tax planning that you may not be aware of.
So, what happened to no tax hikes for those making under $250k?
The particular set of laws that are changing at the beginning of 2011 have been on the books for quite some time. The sunsetting of the tax rates so they revert to higher levels has been known about for ten years now. Legislators have just now started to debate whether these laws should expire as scheduled, or whether to extend the tax rate structure and other tax rules for an additional period of time.