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Major Tax Policy Changes to Affect How Much You Keep
Published: Wednesday, 13 Jan 2010 * 4:09 PM ET Text Size By: Reuters
The next two years will see enormous tax policy changes in the U.S. that are going to have broad implications for how you save and invest — and how much of your money you get to keep.
Right now, most taxpayers are in the lull before the 2010 filing-season storm, and thinking about 1040 forms and tax preparation software.
But it's the 2010 legislative season that will really make its mark. The Senate comes back from recess on Monday, January 18; the House of Representatives is already back.
It's safe to say that every member of each chamber is fully aware this is a Congressional election year, and that the subjects of taxes and deficits and fairness will dominate much of the debate.
There are dozens of tax questions they will have to face between now and then. Here's a rough guide to what's in store.
The estate tax died. So far, there is no estate tax in 2010. That's the result of George W. Bush era tax legislation that phased the estate tax down for eight years and then out in 2010.
Without any legislative action, it will return in 2011 in a much tougher form. It will kick in on any estate worth more than $1 million, and the tax rate will be 45 percent (in contrast to the 35 percent rate on estates over $3.5 million that was in effect last year).
Because both pro- and anti estate-tax advocates want to do something about fixing that (depending on their perspective, they either want to 'fix' 2010 or 2011), expect some legislation this year.
The most likely outcome is a reinstituted estate tax slated to be in effect retroactively to the beginning of this year, and then challenged in court for its retroactivity.
Capital gains complications. When the estate tax died, it took one other provision with it: The tax break heirs got when they inherited investments that had risen in price.
Typically, when an heir inherits a house, or shares of stocks or mutual funds, the value is assessed at the time of the original owner's death, and is included in the estate. But the basis — the acquisition price used to determine whether capital gains taxes are owed — rises to that new assessed level.
So heirs who inherit their parents' home, for example, can sell the home without paying capital gains taxes on it. But that step up in basis is limited in 2010, to $1.3 million for most heirs and an additional $3 million for spouses, unless there is Congressional action.
That may sound like a lot, but $1.3 million isn't really a lot when a family home and lifetime savings are considered. Furthermore, the 15 percent tax rate for long-term capital gains will rise to 20 percent in 2011.
Dividend taxes. Since 2001, dividends earned on stocks and most other securities owned for at least a year have been taxed at a top rate of 15 percent, instead of at taxpayers' top marginal income tax rates.
That expires after 2010, leaving dividends to be taxed as ordinary income in 2011. If that goes into effect, it will be costly and could prompt many investors to dump dividend-paying stocks in favor of growth stocks, or even bonds.
Tax rates will rise. Beginning in 2011, tax rates that were in effect before the 2001 Bush tax cuts will return. The top income tax rate will go up to 39.6 percent from the current 35 percent, and the bottom 10 percent bracket is eliminated, so even the lowest levels of taxable income will be taxed at 15 percent.
In general, Republicans will want to preserve the Bush tax cuts, but Democrats will want to do nothing and leave the higher rates to go into effect so they can use the revenues to help pay down the deficit or pay for other programs and targeted breaks.
A lot of breaks have already disappeared. In addition to the estate tax, the Senate dropped the ball on some 40 provisions that expired at the end of 2009.
They include everything from the extra $250 deduction that teachers get for art supplies to the $1,000 above-the-line deduction for property taxes, as well as a slew of tax breaks for businesses, students, charitable donors and more.
The House has passed an extenders bill, but since it wasn't passed by the Senate and enacted before the end of 2009, anything can happen this year.
More breaks disappear next year. Meanwhile, 2010 is the last year for another large group of cherished tax benefits, like the 4-year college tuition credit (it reverts to two years), the $1,000 child tax credit (it reverts to $500), and expanded uses for 529 college savings plans.
State taxes will go up, too. Most states and municipalities have been hard hit by the recession and the housing slump. They are running out of options for the cash they need to run schools and fix roads. So, watch your local legislature for signs of rising rates and new taxes on everything from plastic shopping bags to colas.
Those health-care taxes. There's still no fixed agreement on which taxes will be included in the health-care reform legislation, but some very strong possibilities include: the new tax on so-called "Cadillac" top-of-the-line policies, a surtax on the wealthy, new limits on health savings accounts and how they can be used, increases in payroll taxes for Medicare.
This decision will be made, most likely over the next few days and weeks, behind closed doors, so anything can emerge in the final bill.
And now for something completely different. Many tax-watchers believe it is inevitable that federal tax rates will rise, and taxes will go up across the board as the economic recovery stabilizes and the government starts wrestling with the deficit.
But there are other possibilities. Some that are mentioned include a national tax on Internet access or shopping (though there's currently a law on the books that prohibits taxing Internet transactions through 2014), or a national sales tax.
Or a national windfall profits tax on banker bonuses. Anything can happen, so watch that space. And enjoy your 2009 deductions while you've got them.
Slideshow: The Wackiest Tax Deductions
Published: Wednesday, 13 Jan 2010 * 4:09 PM ET Text Size By: Reuters
The next two years will see enormous tax policy changes in the U.S. that are going to have broad implications for how you save and invest — and how much of your money you get to keep.
Right now, most taxpayers are in the lull before the 2010 filing-season storm, and thinking about 1040 forms and tax preparation software.
But it's the 2010 legislative season that will really make its mark. The Senate comes back from recess on Monday, January 18; the House of Representatives is already back.
It's safe to say that every member of each chamber is fully aware this is a Congressional election year, and that the subjects of taxes and deficits and fairness will dominate much of the debate.
There are dozens of tax questions they will have to face between now and then. Here's a rough guide to what's in store.
The estate tax died. So far, there is no estate tax in 2010. That's the result of George W. Bush era tax legislation that phased the estate tax down for eight years and then out in 2010.
Without any legislative action, it will return in 2011 in a much tougher form. It will kick in on any estate worth more than $1 million, and the tax rate will be 45 percent (in contrast to the 35 percent rate on estates over $3.5 million that was in effect last year).
Because both pro- and anti estate-tax advocates want to do something about fixing that (depending on their perspective, they either want to 'fix' 2010 or 2011), expect some legislation this year.
The most likely outcome is a reinstituted estate tax slated to be in effect retroactively to the beginning of this year, and then challenged in court for its retroactivity.
Capital gains complications. When the estate tax died, it took one other provision with it: The tax break heirs got when they inherited investments that had risen in price.
Typically, when an heir inherits a house, or shares of stocks or mutual funds, the value is assessed at the time of the original owner's death, and is included in the estate. But the basis — the acquisition price used to determine whether capital gains taxes are owed — rises to that new assessed level.
So heirs who inherit their parents' home, for example, can sell the home without paying capital gains taxes on it. But that step up in basis is limited in 2010, to $1.3 million for most heirs and an additional $3 million for spouses, unless there is Congressional action.
That may sound like a lot, but $1.3 million isn't really a lot when a family home and lifetime savings are considered. Furthermore, the 15 percent tax rate for long-term capital gains will rise to 20 percent in 2011.
Dividend taxes. Since 2001, dividends earned on stocks and most other securities owned for at least a year have been taxed at a top rate of 15 percent, instead of at taxpayers' top marginal income tax rates.
That expires after 2010, leaving dividends to be taxed as ordinary income in 2011. If that goes into effect, it will be costly and could prompt many investors to dump dividend-paying stocks in favor of growth stocks, or even bonds.
Tax rates will rise. Beginning in 2011, tax rates that were in effect before the 2001 Bush tax cuts will return. The top income tax rate will go up to 39.6 percent from the current 35 percent, and the bottom 10 percent bracket is eliminated, so even the lowest levels of taxable income will be taxed at 15 percent.
In general, Republicans will want to preserve the Bush tax cuts, but Democrats will want to do nothing and leave the higher rates to go into effect so they can use the revenues to help pay down the deficit or pay for other programs and targeted breaks.
A lot of breaks have already disappeared. In addition to the estate tax, the Senate dropped the ball on some 40 provisions that expired at the end of 2009.
They include everything from the extra $250 deduction that teachers get for art supplies to the $1,000 above-the-line deduction for property taxes, as well as a slew of tax breaks for businesses, students, charitable donors and more.
The House has passed an extenders bill, but since it wasn't passed by the Senate and enacted before the end of 2009, anything can happen this year.
More breaks disappear next year. Meanwhile, 2010 is the last year for another large group of cherished tax benefits, like the 4-year college tuition credit (it reverts to two years), the $1,000 child tax credit (it reverts to $500), and expanded uses for 529 college savings plans.
State taxes will go up, too. Most states and municipalities have been hard hit by the recession and the housing slump. They are running out of options for the cash they need to run schools and fix roads. So, watch your local legislature for signs of rising rates and new taxes on everything from plastic shopping bags to colas.
Those health-care taxes. There's still no fixed agreement on which taxes will be included in the health-care reform legislation, but some very strong possibilities include: the new tax on so-called "Cadillac" top-of-the-line policies, a surtax on the wealthy, new limits on health savings accounts and how they can be used, increases in payroll taxes for Medicare.
This decision will be made, most likely over the next few days and weeks, behind closed doors, so anything can emerge in the final bill.
And now for something completely different. Many tax-watchers believe it is inevitable that federal tax rates will rise, and taxes will go up across the board as the economic recovery stabilizes and the government starts wrestling with the deficit.
But there are other possibilities. Some that are mentioned include a national tax on Internet access or shopping (though there's currently a law on the books that prohibits taxing Internet transactions through 2014), or a national sales tax.
Or a national windfall profits tax on banker bonuses. Anything can happen, so watch that space. And enjoy your 2009 deductions while you've got them.
Slideshow: The Wackiest Tax Deductions
