The main message we heard when the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was passed in December may have been that “taxes won”™t go up after all.” But, there”™s more to it than that. The act”™s many provisions, in fact, map out the tax planning terrain for the near future.
Indeed, individual income tax rates won”™t go up this year because the act extends the so-called “Bush tax cuts” for two years (through Dec. 31, 2012). That”™s good news because rates now ranging from 10 percent to 35 percent had been scheduled to return this year to previous levels ranging from 15 percent to 39.6 percent.
If you”™re concerned about your alternative minimum tax (AMT) liability, the act offers relief here as well. It increases AMT exemptions that would otherwise have decreased substantially for the 2010 and 2011 tax years, lessening the odds that you”™ll be subject to the tax.
What”™s more, for 2011, you”™ll pay less of your share (as an employee) of Social Security taxes. Rates on earnings up to the taxable wage base ($106,800 in 2011) were dropped from 6.2 percent to 4.2 percent. That means if you earn $100,000 in 2011, you”™ll save $2,000 in payroll taxes over what you would have paid under the previous rate.
How should all of this affect your tax planning? The extension of the lower individual tax rates along with the payroll tax cuts should keep your tax bill at least a little lower for the next couple of years. Start thinking now of ways to put these freed-up dollars to good use, whether paying down debt or starting (or increasing) your savings.
Additionally, for 2011 you can employ the traditional tax planning strategy of deferring income to the next year and accelerating deductible expenses into the current year (unless you expect to be in a higher bracket next year or are concerned about the AMT). This will defer tax to 2012. In 2012, however, you may want to avoid such a strategy. If tax rates do go up in 2013 as scheduled, deferring income to that year could be costly.
If you”™re an investor, 2010 may have had an ominous feel to it, as the 15 percent tax rate on long-term capital gains and qualified dividends (generally 0 percent for those in the 10 percent and 15 percent brackets) was set to expire at year-end.
Again, the Tax Relief act truly brought some relieving news in that these rates have been extended through Dec. 31, 2012. Absent this extension, the capital gains rate would have gone up to 20 percent (10 percent for those in the 15 percent bracket) and qualified dividends would have reverted to being subject to ordinary-income rates as high as 39.6 percent.
In light of these developments, take another look at your portfolio. If you were in a hurry to sell off some appreciated investments to avoid paying tax at the 20 percent rate, you”™ve been granted a temporary reprieve.
In fact, rather than sell the shares, you may want to gift them. If you give long-term appreciated assets to your children or other family members who are in the 10 percent or 15 percent income tax bracket (and they”™re not subject to the “kiddie tax”), they can take advantage of the 0 percent rate on some or all of the gain.
Thus, you”™ll minimize ”“ and perhaps eliminate ”“ the tax that you, as a family, will pay. This strategy may be appropriate if you initially intended to make a gift using the cash from the sale.
On its face, the Tax Relief act didn”™t change things so much as keep them the same for a little bit longer. But that doesn”™t mean you should do nothing. Rather, by opening this window for further tax savings under the current rates, Uncle Sam is essentially saying, “Your move.”
Norman G. Grill Jr., CPA, is managing partner of Grill & Partners L.L.C., certified public accountants and consultants with offices in Fairfield and Greenwich. Reach him at N.Grill@GRILL1.com.
