Tax considerations for year-end and beyond

November 5, 2010

With the year-end approaching, it's a good time to evaluate your financial situation and consider tax-planning opportunities.

Changes in tax rates. Currently, there are 6 marginal federal income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. However, these rates expire at the end of 2010. In 2011, the 10% bracket is scheduled to disappear, and the remaining brackets will return to their pre-2001 levels of 15%, 28%, 31%, 36%, and 39.6%.

The tax rates that apply to long-term capital gains are changing as well. This year, if you sell a capital asset, such as a share of stock, that you've held for longer than a year, any gain on the sale is generally taxed at a maximum rate of 15%. If you are in the 10% or 15% income tax bracket, you will pay no federal tax on long-term capital gains.

ALTERNATIVE MINIMUM TAX DISALLOWS MANY DEDUCTIONS

There are a couple of additional things to keep in mind regarding federal income tax rates. The Alternative Minimum Tax (AMT)-essentially a separate federal income tax system with its own rates and rules-effectively disallows a number of deductions. That can have a big impact on the bottom line for those who are affected.

Legislation temporarily increasing the AMT exemption amounts expired at the end of 2009, setting the stage for a dramatic spike in the number of individuals subject to AMT in 2010. Congress could act to fix this, as it has done repeatedly in the past, but the uncertainty makes it important to stay up-to-date on any new developments.

PLAN FOR NEW MEDICARE TAXES

It's also not too soon to begin considering the new Medicare-related taxes included in the Patient Protection and Affordable Care Act passed earlier this year. Beginning in 2013, individuals will pay an additional .09% Medicare payroll tax on any wages over $200,000. Married couples who file jointly will owe the additional payroll tax on combined wages that exceed $250,000. And a new 3.8% Medicare contribution tax will be assessed on the investment income of individuals with income exceeding $200,000 or married couples filing jointly with income exceeding $250,000.

Estate tax. Congress had 9 years to prevent a scheduled 1-year temporary repeal of the federal estate tax from taking effect, but did not. When the repeal took effect on January 1, 2010, many thought that Congress would move quickly to reinstitute the tax. But as year-end approaches, we are still waiting.