Financial Perspectives: how will 2011 tax changes affect you?

Congress is mulling over what to do about the soon-to-expire Bush tax cuts that were enacted in 2001 and 2003.

As a result of the sunset provision in the tax law, you may have read about the fact that there is no estate tax in 2010. If you were wealthy and had the choice, this would be the year to die.

A great example is George Steinbrenner, who passed away last week. If we assumed that the only asset he held at his death was the Yankees, he saved his family approximately $450 million by dying in 2010 (assuming the value of the Yankees at $1 billion and federal estate rate of 55 percent).

In 201,1 estate taxes will be levied on estates worth more than $1 million. This is a significant change from 2009, when estate taxes did not get assessed until the estate value exceeded $3.5 million.

Since most of us do not have to worry about estate taxes due to the fact that our potential estates are too small, we need to touch on some of the other major changes that are coming in 2011.

First, the highest marginal tax rates are going to increase to 39.6 percent from 36 percent. Even the lower tax brackets are scheduled to change back to the 2000 bracket when 15 percent was the lowest bracket (currently 10 percent is the lowest bracket). There is supposed to be a deal in the works to hold the Bush tax rates for the lower brackets.

A second major change is a higher tax rate on capital gains and dividends. The current tax rate on long-term capital gains and qualified dividends is 15 percent. The rate will increase to 20 percent in 2011. This may not sound like a big change, but let’s put it in dollar terms. If you happen to sell an investment and experienced a gain of $20,000 in 2010 you would owe $3,000 in capital gains. That same gain in 2011 would result in $4,000 in capital gains taxes.

A third major change is a phase-out of deductions and personal exemptions for folks in the 28 percent tax bracket and higher. These changes include a reduction in the child tax credit from $1,000 to $500 per child. The changes will also include a charitable deduction limit of 28 percent — meaning that if you are in the 36 percent bracket you can only receive a 28 percent credit for your charitable donations. Many charities are concerned that such a change will result in a significant drop in donations, especially at a time when contributions have fallen due to the economy.

Finally, those taxpayers who are subject to the Alternative Minimum Tax will have to hope that Congress will pass another one-year patch that will increase income threshold for those subject to the ax calculations. At this point, married couples with income above $70,950 could potentially be subject to AMT.

Just to remind you, AMT was intended to prevent high income earners from exploiting the tax system with large numbers of exemptions or high deductions. Unfortunately, the AMT tax code language did not include an inflation adjustment for the income threshold.

Whatever tax bracket you are in, you really should do a little research to see what impact these changes could have on you. Accelerating income into 2010 could make sense in certain situations, as could consideration of doing a Roth Conversion of some of your IRAs.

If you do not feel comfortable doing this analysis yourself, I would suggest seeking the advice of a CPA or tax professional. Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/ Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Family Wealth Services, LLC and Cambridge are not affiliated.

Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC 8725 Frankford Avenue Philadelphia, PA 19136 jim@familywealthservices.net 215-332-4968

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