Planning Strategies for 2010 Taxes

While most individuals have not yet filed their 2009 income tax returns, it’s never too early to look ahead to the changes coming in 2010 and 2011 to help determine how the changes will affect your taxes.  

Although it is likely that Congress will pass one or more changes to the tax laws during 2010, there are changes that will take place automatically as a result of the automatic sunset provisions of the Economic Growth and Tax Relief Act of 2001 if Congress doesn’t act. Below are several items that will change without any Congressional action and a look at the current budget proposals.

Income Tax Rates

Taxable income is currently taxed at the following rates: 10%, 15%, 25%, 28%, 33% and 35%. The size of the 15% tax bracket for married filing jointly is twice as great as for single taxpayers.

In 2011, the rates will be: 15%, 28%, 31%, 36% and 39.6%. The size of the 15% tax bracket for married filing jointly will be 167% of the 15% bracket for single taxpayers.

The current administration proposal for 2011 is for the following rates: 10%, 15%, 25%, 28%, 36% and 39.6%. The 15% bracket for married filing jointly would continue to be 200% of the 15% bracket for single filers and the 28% would be expanded to assure that taxpayers won’t see their taxes rise as a result of the increase in the top two brackets. For married taxpayers filing jointly, the 36% rate would apply to taxable income above $250,000 less the standard deduction and two personal exemptions, indexed from 2009; for single taxpayers the 36% rate would apply to taxable income above $200,000 less the standard deduction and one personal exemption, indexed from 2009. The 39.6% bracket would apply to taxable income over $373,650 for married taxpayers filing jointly, heads of household and single filers, with the taxable income level indexed for inflation for 2011 and following.

Capital Gains Tax Rates

Most long-term capital gains are currently taxed at a 15% rate while some qualify for a rate as low as zero percent. The zero percent tax rate applies to long-term capital gains that would otherwise be taxed in the 15% tax bracket or less if it was ordinary income. So for married taxpayers filing a joint return there would be no tax due on long-term capital gains of up to $67,900 for 2009. Qualified dividends are also taxed to individuals at the same rates that apply to long-term capital gains.

In 2011, long-term capital gains will be taxed at 20% and dividends paid to individuals will be taxed at ordinary income tax rates.

The current administration proposal for 2011 is for a 20% rate to apply to long-term capital gains and qualified dividends of married taxpayers filing a joint return with income over $250,000 less the standard deduction and one personal exemption. Taxpayers below this level would be subject to the current rates of 0% and 15% for long-term capital gains and qualified dividends.

Deductions

Currently, the standard deduction for married taxpayers filing jointly is 200% of the standard deduction for single taxpayers, i.e. $11,400 for MFJ and $5,700 for singles for 2009. For 2010, there is neither reduction of itemized deductions for high-income taxpayers nor a reduction of the personal exemption.

In 2011, the standard deduction as result of the sunset provisions will be 167% of the standard deduction for single taxpayers. High-income taxpayer’s itemized deductions (except for medical, investment interest, casualty, theft or wagering losses) will be reduced by 3% of adjusted gross income (AGI) over an inflation-adjusted amount. Personal exemptions will also be reduced when AGI exceeds an inflation-adjusted amount.

The current administration proposal for 2011 is to keep the standard deduction for married filing jointly at 200% of the deduction for a single taxpayer. The AGI based phase-out of the itemized deductions and personal exemption would be reinstated. The value of all itemized deductions would be limited to 28% whenever they would otherwise reduce taxable income in the 36% or 39.6% brackets.

Alternative Minimum Tax

The alternative minimum tax exemption amounts are scheduled to decrease in 2010 to $45,000 for married filing jointly and $33,750 for single filers. However, Congress has been has been adjusting these exemptions on an annual basis for a number of years and there is no reason to believe that they will not continue to do so. The exemption amounts for 2009 were $70,950 for married filing jointly and $46,700 for single filers.