Your Taxes May Go UP, UP, UP on January 1, 2011

What’s in Your Wallet?
Income taxes will automatically increase on January 1, 2011 due to former President George Bush’s tax legislation passed in 2001 and 2003. After the November elections, Congress could extend the tax cuts, modify the tax cuts or just go into grid lock until the next Presidential election. The tax brackets will be as follows if Congress doesn’t act fast:

  • 10% bracket will increase to an expanded 15% bracket
  • 25% bracket will increase to a 28% bracket
  • 28% bracket will increase to a 31% bracket
  • 33% bracket will increase to a 36% bracket
  • 35% bracket will increase to a 39.6% bracket

The marriage penalty will be reinstated which may cause two-earner couples to owe more tax. For tax payers in the 10% and 15% income tax brackets, the capital gains tax will go from 0% to 20%. For all other tax payers, the capital gains tax will increase from 15% to 20%. The dividends tax will increase from 15% to potentially 39.6% for the highest income tax payers. Itemized deductions and personal exemptions will begin to phase out which technically has the same effect as higher marginal tax brackets. Your child tax credit will decrease from $1,000 to $500 per child. Dependent care calculations for expenditures will decrease from $3,000 to $2,400 for one dependent and decrease from $6,000 to $4,800 for two or more eligible dependents. Stepping up your basis at death for inherited property is reinstated. The top estate tax rate of 55% returns as well as the $1 million estate tax exemption. Millions of people will pay more taxes due to the increased alternative minimum tax (AMT) exemption expiration. For businesses, the immediate $250,000 expenses of business equipment provision will change to $25,000 and the 50% bonus depreciation will expire.

Wall Street seems to be betting on the extension of the Bush tax cuts. Ben Bernacke, Federal Reserve chairman, has encouraged the Obama administration to extend the tax cuts due to a slow economy. But, will our elected officials listen? Ben Bernacke has been utilizing every means possible to keep our country out of deflation and increase employment. So far, he has kept our country out of a great depression. This tax increase may present even greater challenges for him due to less money being spent by the taxpayers on goods and services, slowing the economy even further. In addition, individuals holding dividend paying stocks may reposition to interest paying bonds due to the tax increases. Also, taxpayers may sell appreciated stock to increase their basis paying the 15% capital gains tax versus paying 20% capital gains tax. Politically, the tax debate will be played out on the headlines over the next few months. Everyone knows our government needs money for entitlement programs, debt payments, defense and operating budgets. The best way to make this happen is for each political party to dig its heels in on its position and not budge. This will increase government tax income and allow them to play the blame game through the next Presidential election. Unfortunately, we will have to wait and see!

Jeffery Palmer offers investment advisory services as a representative of Prudential Financial Planning Services, a division of Pruco Securities, LLC (Pruco). The Palmer Group is not affiliated with Pruco. Other products and services may be offered by a non-Pruco entity. Neither Jeffery Palmer nor The Palmer Group offer legal, tax or accounting advice. You should consult with your own advisors regarding your particular situation. Neither Jeffery Palmer, The Palmer Group nor Pruco are affiliated with