2010 Tax Changes To Be Aware Of
By Russell Dunkin
1/8/2010
You have probably heard many predictions about the future direction of personal taxes. Dating back to the 2008 campaign, everything from income tax brackets, to the estate tax, as well as capital gains tax rates have been debated. What is often lost in the discussion, is what is scheduled to happen this year, and 2011, even if Washington doesn't do anything.
That's right.
Taxes will be changing, even without action by Congress.
This stems from the Economic Growth and Tax Relief Reconciliation Act, or EGTRRA, that was passed in 2001. The act significantly altered several areas of the US Internal Revenue Code, including federal income tax rates, estate and gift tax exclusions, and qualified plan rules (retirement plans). Many of these changes were set to be phased in over a nine year period, and then "sunset", or expire, on January 1, 2011.
Then, in 2003, the Jobs and Growth Tax Relief Reconciliation Act (or JGTRRA) was passed. Among other things, this eliminated the phase in of EGTRRA, and lowered tax rates on dividend income and capital gains rates.
Here are a few of the key changes that are scheduled to happen between now and 2011.
Federal income tax rates - EGTRRA reduced each tax bracket and created a new 10% bracket. The brackets were lowered from 15%, 28%, 31%, 36% and 39.6%, to 10%, 15%, 25%, 28%, 33% and 35%. If Congress does not act this year, the brackets are set to revert back on January 1, 2011 to the higher rates that were in place in 2001.
Investment taxes - Previously, long term capital gains were taxed at rates of 8%, 10%, and 20%. Under JGTRRA, they were lowered to 5% and 15% depending on your income tax bracket. In 2010, if you are in the 10% or 15% bracket, the capital gains rates go to zero, and reset to 10% in 2011. If you are in a higher bracket, the rate will be 15% for this year, and rise to 20% in 2011.
Currently, if you are in the 15% or lower tax bracket, you do not pay any taxes on dividends. If you are above the 15% bracket, you pay 15% tax on dividends. Beginning in 2011, the tax rate on dividend income, will revert back to being taxed as ordinary income, at your highest marginal tax rate.
Estate taxes - EGTRRA also adjusted many aspects of the estate tax. The top rate was reduced from a maximum of 55%, to 50%, and then incrementally down to 45% in 2007. Also, the unified credit exclusion (the amount that can be passed free of estate tax) was gradually raised to $1,000,000 in 2002, and to $3,500,000. In 2010, it is set to be unlimited, before reverting to the $1,000,000 level in 2011. The tax rate, also reverts to a maximum of 50% in 2011.
Roth IRA conversions - Also new for 2010, is the ability of anyone, regardless of modified adjusted gross income, to convert a traditional IRA to a Roth IRA. Previously, if you had modified adjusted gross income of more than $100,000, you were unable to do a conversion. Roth IRA's can offer tax-free growth and distributions, as compared to Traditional IRA's which offer an upfront deduction, but taxable distributions. For anyone completing a conversion in 2010, the tax owed may be split between 2011 and 2012.
Removing the limit on conversions, effectively eliminates the income limit on contributions to Roth IRA's as well. Currently, contributions are phased out for married couples with earned income over $176,000, and for single filers earning over $120,000. By removing the restriction on conversions, a taxpayer with income too high to contribute, could make the contribution to a Traditional IRA (which doesn't have income limits) and immediately convert to a Roth.
While there is much speculation over what might happen in the coming years, these are some of the changes that are scheduled to happen. Although it is very easy to get caught up in the day to day debate over policy in Washington, it is probably far more productive to base your plans on what we do know, and make adjustments as changes warrant.
Russell Dunkin CFP®, is a wealth advisor with McKinley Carter Wealth Services (www.mc-ws.com), an SEC registered investment adviser with its principal place of business in the State of West Virginia. The information contained herein is general market information only and is not intended to be personalized investment advice. Mr. Dunkin can be contacted at rdunkin@mc-ws.com, 304-230-2400 or 866-306-2400.