Some of the tax laws that were passed in the early years of this century will expire after 2010. Next year, prior law could take effect. Alternatively, Congress may pass new tax laws effective in 2011-or even some laws that are retroactive to the beginning of2010. Therefore, tax planning for year-end 2010 is unusually challenging.
The articles in this issue of the CPA Client Tax Letter are based on current law, as of this writing. However, Congress may act by year-end, changing current law substantially. Therefore, our office will keep you posted to let you know what changes, if any, have been signed into law and how they might affect your personal tax planning.
Income tax
In 2010, six federal income tax rates exist, ranging from 10% to 35%. Current law calls for five tax rates to be in effect for 2011, from 15% to 39.6%. As you can see, such a change would increase tax obligations for many people. In that case, year-end tax planning might suggest accelerating income into 2010, to pay tax at lower rates, while deferring deductions until 2011 when higher tax rates might make deductions more valuable.
The Obama Administration has proposed keeping 2010 tax rates for most taxpayers; only those with income over $200,000 ($250,000 for married couples filing joint returns) would face higher rates. As some lawmakers have pointed out, though, such a limited increase might do little to reduce the federal budget deficit. Therefore, Congress could decide to increase tax rates for people earning $150,000; $100,000; or even less. On the other hand, some federal legislators have suggested keeping the tax rates of 2010 in effect for another year to help stimulate the economy.
In addition, many specific income tax breaks expired after 2009. For example, you could deduct sales tax in 2009 but not in 2010. Congress may pass a so-called “extenders” bill that would reinstate those tax breaks for 2010. Such a bill, if passed, could lead you to change your year-end strategies.
Estate tax
The federal estate tax has not been in effect for deaths occurring in 2010. Some lawmakers have announced their intention of reinstating the estate tax for 2010, but such an effort, if successful, would be controversial, to say the least. The deeper in the year we go before any change in estate tax law happens, the less likely it becomes that the federal estate tax will be retroactively instituted for 2010.
Regardless of how deaths in. 2010 are treated, it’s highly probable that the federal estate tax will be back in effect for deaths in future years. Under current law, the estate tax exemption in 2011 would be only $1 million. If that happens, many estates would owe federal tax, based on the value of the decedent’s home, investments, life insurance, and so on.
Some Senators and Representatives have suggested increasing the exemption amount to $35 million, the same as it was in 2009. Others would like to see an even larger exemption, perhaps $5 million. Lawmakers also are debating the issue of “portability”: the idea of allowing a surviving spouse to use any remaining federal estate tax exemption that was not fully used by the first spouse when he or she died.
Estate tax rates also are on the table. In 2009, the last year this tax was in effect, the top rate was 45%. Under current law the to rate will be 55%, plus a 5% surtax for very large estates. Some people in Congress favor bringing the rate down to 45% and others would go even lower. Any revisions in the federal estate tax rules also would affect the gift tax and the generation-skipping transfer tax.
With far-reaching changes in tax law likely to pass in late 2010, feel free to contact our office periodically to keep up with legislative developments. Once the situation has clarified, we can help you accomplish two key goals: determining whether your estate plan needs to be updated and getting timely ideas for year-end income tax savings.