The tax compromise extending Bush-era tax cuts has now been signed into law. It has cleared up some uncertainty concerning tax rates and deductions that made tax planning
problematic for both this year and next. At the least, we hope the compromise brings certainty through 2012.
The following main points summarize the compromise:
- The lower tax rates of 2010 will remain in effect for all taxpayers through 2012.
- The top individual tax rate will remain at 35%.
- The capital gains will remain at 15% and will not rise to 20%.
- Dividends will remain taxed at 15% and will not rise to ordinary rates.
- The planned return of high income phase-outs for exemptions and itemized deductions has been postponed two more years.
- The annual last minute Alternative Minimum Tax (AMT) patch was enacted for 2010 and will remain valid through 2011.
- This means more than 20 million taxpayers will not see the adverse impact of this parallel tax system.The estate tax has been reinstated effective 2010 (by election) through 2012 at a lower rate and includes a higher exemption.
- The estate tax rate will be 35% on estates over $5 million down from 45% on estates over $3.5 million.
- For 2010 there is no estate tax (but there is a carry-over basis on inherited assets.) The estate now has the election for either the current law or the new law of a 35% rate for assets over $5 million and a stepped-up basis on inherited property.
- All taxpayers will see a 2% drop in their social security taxes for 2011 only.
- This allows a small drop in taxes to stimulate the economy and replaces the Making Work Pay credit.
- Unemployment insurance benefits will be extended for 13 months through 2011.
- Businesses will be allowed to write off 100% of new investments in capital goods in 2011.
- Various family and education credits will be maintained or expanded and several itemized deductions will be continued through 2011.
As a result of the compromise, questions necessarily arise. What moves should be made, if any, by year-end 2010 or thereafter, to take advantage of the new rules? The following recommendations summarize what to do next:
- There is no need to sell capital gain assets this year just to avoid the tax rise in 2011. This should reduce your potential tax bill in 2010 if there were plans to trigger sales to take advantage of the lower tax. There will be no renewal of phase-outs of exemptions and itemized deductions for 2011 and 2012. Therefore there is no need to accelerate 2011 deductions into 2010 for high bracket taxpayers.