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Some Sunsets Aren’t So Pretty: The 2011 Tax Changes

Posted on 15 August 2010 by admin (0)

The whole world – or at least a good chunk of American taxpayers – seems to be in a state of high freak about the tax changes expected in 2011. Are you among them? Should you be? These are the questions addressed in today’s blog dear friends.

First off, to be clear, what we’re actually facing is the “sunset” of certain portions of tax reform legislation that was passed in 2001 under former President George W. Bush. Meaning, we’re going back to tax structures that existed under former President Bill Clinton … ah, yes, remember the days of robust economic growth that we all so happily enjoyed? OK, we’ll leave reminiscences for another blog, and focus instead on the matters at hand: what’s changing, how it will affect you, and what you can do to mitigate unpleasant effects on your wallet.

What’s Changing? And by How Much?

Three major things are changing:

  • Tax rates on Ordinary Income
  • Tax rates on Long Term Capital Gains
  • Tax rates on Qualified Dividends

Ordinary Income

The tax rates for ordinary income are going up as follows:

Long Term Capital Gains

Also, tax rates on Long Term Capital Gains are going up from 15% to 20% for single filers with taxable income over $34,000 and joint filers with taxable income over $68,000.

Qualified Dividends

And, finally, qualified dividends will no longer enjoy a 15% preferential rate, but instead will be treated as ordinary income subject to whatever tax bracket you are in.

Is this the end of the world?

Not really, but it’s not fantastic either. Is it inevitable? Probably, in the short term, since it’s unlikely that Congress would act to change this prior to elections in November, or in the lame duck session between November and January.

What’s a Guy or Gal To Do?

OK, here’s where the rubber meets the road. Several suggestions are laid out below. But, I strongly advise you to discuss them with me since every person’s situation is different and it takes some investigation to make sure that your tax strategy is exactly right for you. You can call me at 212-308-5495 or email me at thetaxxman@aol.com.

Turn It Upside Down

Usually we look to defer income into the next tax year in order to pay less tax today. This year, not the case, since we know taxes are rising in 2011. This year, take in as much income as possible before December 31, 2010 in order to benefit from the lower current rates.

Defer Strategically

Again, typically we look to make as many charitable donations and incur as many business expenses as possible before year-end. Not this year. This year doing the opposite – delaying charitable donations and business expenses, like equipment purchases, until 2011 – will make these deductions more valuable to you.

The same holds for payment of state and local taxes, which are deductions against federal income tax: Wait until after January 1st to make these payments so that the deductions benefit you next year.

Take Your Gains

The one thing you will want do this year is take and pay for capital gains in order to benefit from the 15% preferential tax rate.

Hold On to Your Losses

But, don’t sell anything where you will realize a capital loss. You want to keep the losses in your pocket and apply them in 2011 when they will shelter your income at 20%.

Questions? Comments? Still Dismayed?

Call or write and let me know, I’d love to help.

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