Many tax cuts that were passed during the Bush era are scheduled to expire at the end of 2010. The Obama administration, however, has indicated its intention to extend some of those tax cuts, and it seems likely that Congress will see fit to make such extensions.
As far as I can tell, the consensus appears to be that the following scheduled changes are likely to occur:
- Long-term capital gains will go back to being taxed at a maximum rate of 20% rather than 15%.
- The top tax bracket (currently 35%) will go back up to 39.6%.
- The second-to-top tax bracket (currently 33%) will go back up to 36%, though the lower end of the bracket will be bumped up.
… and the following scheduled changes are not likely to occur:
- The 10% tax bracket will not be eliminated as scheduled.
- Dividends will not go back to being taxed as ordinary income as scheduled, though they will — like LTCGs — be taxed at a max rate of 20% instead of 15%.
- The standard deduction for married couples filing jointly will not be reduced as scheduled.
- The top end of the 15% tax bracket for married couples filing jointly will not be reduced as scheduled.
- The middle two tax brackets (currently 25% and 28%) will not rise back to 28% and 31% as scheduled.
Taken together, the above changes would leave us with the following projected 2011 tax brackets (courtesy of the Tax Policy Center):
Single 2011 Tax Brackets (Projected)
| Taxable Income |
Marginal Tax Rate: |
| $0-$8,425 | 10% |
| $8,425-$34,200 | 15% |
| $34,200-$82,850 | 25% |
| $82,850-$192,000 | 28% |
| $192,000-$375,700 | 36% |
| $375,700+ | 39.6% |
Married Filing Jointly 2011 Tax Brackets (Projected)
| Taxable Income |
Marginal Tax Rate: |
| $0-$16,850 | 10% |
| $16,850-$68,400 | 15% |
| $68,400-$138,050 | 25% |
| $138,050-$232,950 | 28% |
| $232,950-$375,700 | 36% |
| $375,700+ | 39.6% |
Head of Household 2011 Tax Brackets (Projected)
| Taxable Income |
Marginal Tax Rate: |
| $0-$12,000 | 10% |
| $12,000-$45,800 | 15% |
| $45,800-$118,300 | 25% |
| $118,300-$189,350 | 28% |
| $189,350-$375,700 | 36% |
| $375,700+ | 39.6% |
Married Filing Separately 2011 Tax Brackets (Projected)
| Taxable Income |
Marginal Tax Rate: |
| $0-$8,425 | 10% |
| $8,425-$34,200 | 15% |
| $34,200-$69,025 | 25% |
| $69,025-$116,475 | 28% |
| $116,475-$187,850 | 36% |
| $187,850+ | 39.6% |
Planning for Tax Changes
So what should we do to minimize our own taxes in the face of such changes? A few things come to mind.
First, if you’re planning to sell any of your holdings (in a taxable account) that have appreciated in value, you may want to consider doing so before the end of the year.
Second, if you expect to find yourself in a higher marginal tax bracket starting next year:
- It may make sense to accelerate your income to the extent possible so that it occurs in 2010 rather than 2011.
- Conversely, if possible, you may want to delay some of your deductions so that they apply to 2011 rather than 2010.
- You may want to consider using tax-free bonds, bond funds, and money market funds instead of their taxable counterparts, if you’re not already doing so.
Lastly, if it begins to look like the special tax treatment of dividends is not going to be extended (that is, if it looks like dividends will begin to be taxed as ordinary income), the following changes may be wise:
- For those of you who pay attention to asset location, it would make sense to tax-shelter high-dividend stocks/funds before tax-sheltering low-dividend stocks/funds.
- For anyone looking to generate income from a taxable portfolio, high-dividend stocks and funds will become meaningfully less attractive compared to alternatives (such as CDs and bond funds).
What are your thoughts? How are you planning to minimize your taxes in light of upcoming changes?
One quick note: Please keep any comments to the topic of how to plan for tax changes. Like all of you, I have my opinions on whether tax burdens should be increased, decreased, or redistributed, but this is not the place for such discussion. I won’t hesitate to delete any comments of a political nature.
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A nice piece, but bad news.
From above, I note the marriage penalty is back. i.e. the brackets are not 2X the single rate breaks, and a divorce may save some money.
Second observation – the Roth Mania may cost money as the hype talks about deferring converting amounts into 2011/12. This could be a large #RothFail indeed.
Well, according to the proposed budget, there is a marriage penalty. But it would start in roughly the same place it does now — $138,050 in 2011 as opposed to $137,300 in 2010.
As to your second observation: Agreed.
Is there any word on what the standard decution and personal exemption will be for 2011? Will they still be $5,700 and $3,650 (i think that’s what they are currently)?
I have not heard any word on what they’ll be for 2011.
How about the AMT? Is there any chance of reform on that front?
Good heavens, I hope so. But I haven’t heard any concrete news about it. If anybody else has some info, please share!
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