If Congress does not act soon, January 1st, 2011 will see one of the largest increases in taxation ever. There are no fewer than 10 adjustments to the tax code that affect 3 different areas of financial planning, and probably require all of us to revisit some of the assumptions in our longer term wealth management. Here is a quick review of things to come:
Income Tax Rate Increases
1. Top Federal Rate rises from 35% to 39.6%
2. 33% Federal Rate rises to 36%
3. 28% Federal Rate rises to 31%
4. 25% Federal Rate rises to 28%
5. 10% expires and reverts to 15%
6. Standard deduction for married couples no longer double that of unmarried filers
True, over half of these 10 changes come from Federal Income Tax increases, but the significance of rising income tax for all of us is huge given the fragile state of the economic recovery. There is an obvious affect on expendable income, as well as small business’ ability to grow. At the same time, there is a need to balance that want for economic growth with growing government debt.
Taxes on Investment
7. Maximum Long-Term Capital Gains tax rises from 15% to 20%
8. Tax rate for qualified dividends rises from 15% to Ordinary Income rates (as high as 39.6%)
It is important to note that an increase in long-term capital gains from 15 to 20% is not a 5% increase… it is a 33% increase! These two potential changes will be very significant to our thoughts on after-tax investments. What I call Asset Location (meaning the choice of investment vehicle & use of registration) will become even more important, as tax efficiency and transparency of holdings becomes paramount. It may become tempting for investors to run to federally tax-free muni bonds, but more than likely these will not be the best option. Tax-free investments tend to benefit investors in the highest tax brackets the most.
Estate Taxes
9. Estate tax redemption will decrease from $3.5 million (2009) to $1 million
10. Top Estate and Gift tax rates rise from 45% (2009) to 55%
Estate planning has been a moving target since the “sun-set” provision was written into legislation earlier in the decade. 2010 saw most wealth transfers pass untaxed. With these two changes poised to set estate planning assumptions back 10 years, now is a good time to review your documents to make sure they still accomplish the goals for which they were originally designed.
Because of these significant changes, the team at our office is hosting a workshop and open house on this topic in October to kick off our tax planning season. Please be sure to attend!
