Guest post by Lena Rizkallah (learn more about Lena at the end of this post)
It’s the first week of the New Year, and already there seems to be a change of energy and momentum in the air. People are optimistic–almost happy!–and it’s as if the end of 2010 wasn’t just the end of a calendar year but the end of tough times. It seems that January has not only ushered in a new year, but also the potential for more opportunity, growth, financial stability and economic progress for everyone.
This newfound optimism could be the usual bright-eyed resolve that comes with a new year, but it more likely resulted from something else: the passing of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“the tax bill”) in December.
After a year of uncertainty and tumult, Congress finally got around to making some crucial decisions in the last month of 2010. The Bush tax cuts, set to expire after December 31, 2010, had lowered most income tax brackets, capital gains and dividend tax rates over the past decade. The Bush cuts also gradually raised the estate exemption and lowered the estate tax from 2001 until 2010, when the estate tax disappeared for that year only.
Barring any Congressional action to change this law, taxes were set to revert back to their pre-2001 rates on January 1, 2011. The top ordinary income tax rate was set to return to 39.6%, capital gains to a 20% tax rate and dividends to 39.6%. The estate tax also would have reverted to 55% with a $1 million estate exemption. No one wanted to see taxes increase across the board, most of all President Obama and the newly elected Congress.
Finally, after tough negotiations with Republican leaders, the President announced a comprehensive tax package that not only addressed income, capital gains and estate tax rates, but also the AMT, unemployment insurance and many expiring individual and business tax credits and incentives.
What’s in the Tax Bill?
– Extends the 2010 income tax, capital gains and dividend tax rates for all Americans. That means that the top income tax bracket remains at 35%, top capital gains and dividend tax rates are still 15%, and those taxpayers in the lower tax brackets (10-15%) will continue to owe 0% capital gains tax. These tax rates will remain in effect through 2012.
– Extends the repeal of phase-outs of personal deductions and limits on itemized deductions for higher income taxpayers through 2012.
– Allows individuals aged 70 ½ and older who must take RMDs from Individual Retirement Accounts (IRAs) to withdraw up to $100,000 and donate to charitable organization. The taxpayer will not receive a charitable deduction for the contribution, but the RMD will not be treated as income. This provision was extended through 2011.
– Extends an AMT patch that would exempt families with income up to $72,450 ($74,450 in 2011) or individuals with income up to $47,450 ($48,450 in 2011) from being subject to the AMT in 2010 and 2011.
– Implements a payroll tax holiday for workers in 2011. The bill reduced by 2% the amount of Social Security tax an individual employee would be required to pay. In 2011, workers will pay 4.2% tax on their income (up to $106,000 or so) as opposed to the normal tax of 6.2%.
– Allows businesses to take a 100% depreciation write-off for investments in certain new business equipment in 2010 and 2011.
– Extended many energy and business credits and incentives, such as the Research & Development credit.
– Extends certain middle class incentives and credits such as the Earned Income Credit and Coverdell Education Savings credit.
– Extends unemployment insurance coverage through 2011.
Although most of the tax rates and benefits in the tax bill are set to expire in 2011 or 2012, there are many planning opportunities we should consider in the meantime.
Here are some opportunities:
- If you are in a 10-15% tax bracket, consider selling some of your appreciated stock to take advantage of the 0% capital gains tax rate.
- Review your investment portfolio to identify certain appreciated positions to sell now before taxes potentially increase in 2013.
- The Social Security tax holiday is designed to leave more money in our paychecks. For every $50,000 in wages, you save $1000 from taxes. Consider using the extra money to pay down debt, save or contribute to your 401(k) plan.
- Take advantage of tax-loss harvesting and tax-advantaged strategies.
- Consider investing in assets that provide tax diversification. Variable annuities and life insurance provide tax-deferral so you don’t pay on-going taxes on investment build-up until you take a distribution from your investment.
- In fact, now is an especially good time to consider tax diversification, especially in light of the 3.8% Medicare tax that will be imposed on certain investment income for higher income Americans beginning in 2013. Besides tax-deferral, consider planning strategies that provide you with tax-free income in retirement, such as municipal bonds or Roth IRAs.
Besides these and many other financial planning strategies available to us thanks to the tax bill, we have tremendous estate planning opportunities. The tax bill raised the estate exemption to $5 million for 2011 and 2012, and also unified the gift, estate and GST tax exemption to $5 million with a 35% tax rate. The nuances of the new estate tax law, as well as pitfalls and opportunities, will be addressed in my next post. Stay tuned for more excitement!
About the author
Lena Rizkallah of Mosaic Consulting is an attorney who focuses on legislative developments, tax and fiscal policy, and advanced strategies for investment and retirement planning and products. She also writes and presents on trusts, estate planning and charitable giving arrangements.
Susan Gunelius
Susan Gunelius is the Founder and Editor-in-Chief of Women on Business. She is a 30-year veteran of the marketing field and has authored a dozen books about marketing, branding, and social media, including the highly popular Ultimate Guide to Email Marketing, 30-Minute Social Media Marketing, Content Marketing for Dummies, Blogging All-in-One for Dummies and Kick-ass Copywriting in 10 Easy Steps. Susan’s marketing-related content can be found on Entrepreneur.com, Forbes.com, MSNBC.com, BusinessWeek.com, and more. Susan is President & CEO of KeySplash Creative, Inc., a marketing communications company. She has worked in corporate marketing roles and through client relationships with AT&T, HSBC, Citibank, Intuit, The New York Times, Cox Communications, and many more large and small companies around the world. Susan also speaks about marketing, branding and social media at events around the world and is frequently interviewed by television, online, radio, and print media organizations about these topics. She holds an MBA in Management and Strategy and a Bachelor of Science degree in Marketing and is a Certified Professional Career Coach (CPCC).
Follow Me:
