Higher Taxes Coming: Tax Advisors Can Help Soften the Blow
Congress has scheduled to return to Washington and the battle over extending the current tax rates or letting them expire this year will begin.
Hanging in the balance of this battle are higher income Americans who will have a have a high price to pay depending on the outcome.
Married couples earning about $1 million in income, with an additional $50,000 in capital gains and $10,000 in dividends could pay an estimated additional $45,300 in federal income taxes, $2,500 in capital gains, and $2,460 in additional taxes on dividends. For these folks that an additional $50,300 of additional taxes if Congress doesn't extend the tax rates scheduled to expire at the end of this year. Use this calculator to figure what your additional tax burden could be.
An estimated 315,000 U.S. taxpayers earn more than $1 million, according to the Joint Committee on Taxation.
Unless Congress acts to extend the current tax rates, in 2011, the top federal income tax rates will go to 39.6 percent, up from 35 percent, and capital-gains rates will increase to 20 percent from 15 percent. The 15 percent rate on qualified dividends would go away and all dividend income would be taxed as ordinary income with rates as high as 39.6 percent.
Also expect your state income taxes to go up too. Nine states have already raised their personal income tax rates last year to as much as 11 percent, according to the Washington-based Tax Foundation, a research group. California's top rate is now a staggering 10.55 percent on income above $1 million.
And starting in 2013, there will be a 3.8 percent additional tax on unearned income such as capital gains and dividends, which was a part of the fund health insurance reform law Congress passed earlier this year.
Taxpayers with taxable income that exceeds $373,650 in 2010 and beyond will be the most severely impacted. Needless to say, if you will be affected, you should have a discussion about tax planning strategies with your tax and financial advisor sooner rather than later. Here are a few tax planning strategies for folks in the top income tax brackets to consider.
- Accelerate any income you can into this year so it will be taxed at the 35 percent marginal rate, rather than the 39.6 percent rate in 2011. Folks working for large corporations typically receive bonuses for 2010 in the first quarter of 2011. But folks working for smaller and mid-sized businesses may have more flexibility to take their bonuses in December and even accelerate some of their pay for next January into the end of this year as well.
- Executives who are planning to exercise stock options should consider doing so before year-end. Doing so will ensure that the income realized will be taxed at current rates.
- Make sure to defer the maximum pre-tax amounts to your retirement plans in 2010. Folks age 50 or older in 2010 can also make additional catch-up contributions.
- If you are considering converting your traditional IRA to a Roth IRA, then do it this year. While the rules permit spreading the taxes owed over two years - 2011 and 2012 - taxpayers may be better off choosing to pay the full bill in 2010 while the lower tax rates are still in effect.
- If you are thinking about selling an appreciated asset such as stocks, a business or real estate, then it may be better to complete the sale this year. The tax rates for capital gains will go up to 20 percent from 15 percent next year if the current tax rates are allowed to expire.
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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