The next few months will be a pivotal time for your 2011 tax planning. Between now and December 31, Congress will take crucial action – or not – to decide whether to extend the Bush income and estate tax cuts of 2001. What happens in Congress, including the upcoming elections, may have a significant impact on your income tax and estate planning.

As you may have observed, tax decisions tend to take low priority in Congress. If the Bush tax cuts of 2001 are not extended (probably due to political gridlock), we will witness one of the largest tax increases in history.

History

In 2001, then-President George W. Bush proposed, and Congress enacted, a number of income and estate tax reductions.  Congress passed these cuts through a reconciliation process.  This reconciliation resulted in these cuts automatically expiring after 2010.

Thus, if Congress does not act, taxes in 2011 will revert to the rates in effect in 2000.

The Federal Income Tax

The schedule below compares 2010 tax rates with those that will take effect in 2011 if Congress does not act:


The biggest change, however, could be in the qualified dividend area, which would increase from 15% to as high as 39.6%.  This is highlighted in the chart below.  Also highlighted is the effect on the tax rates for 2013 when the new health care laws become effective and impose an additional 3.8% tax on investment income for taxpayers whose modified adjusted gross income exceeds $200,000 for single tax payers or $250,000 for married couples filing joint returns.


The Federal Estate Tax

The estate tax in 2011, and going forward, will also be significantly more onerous if Congress does not act.

In 2009 an individual could leave up to $3.5 million to a non-spouse beneficiary without incurring a federal estate tax.  For the current year, 2010, there is no federal estate tax. You may recall hearing that heirs of George Steinbrenner, the late owner of the New York Yankees who died in July, saved almost $500 million in federal estate taxes, on a $1 billion estate. This pales in comparison to Dan Duncan, owner of natural gas processing plants in Texas, whose heirs will inherit over $10 billion with no estate tax.

However, if Congress does not act, the federal estate tax is reinstated on January 1, 2011, and will tax all non-spouse inheritances in excess of $1 million dollars, with progressive tax rates going as high as 55%.  If billionaire Dan Duncan died in 2011 rather than 2010, his estate would have paid up to $5.5 billion more to Uncle Sam than it actually paid.

See the chart below for the comparisons,:


In Conclusion

Brinton Eaton will be keeping an eye on Congressional activity, including the November elections, for developments in the area of income and estate taxes. We will keep you informed as to how, and to what extent, any decision or indecision is likely to impact your family’s financial situation.

As always, if you have any questions or concerns, please do no hesitate to contact us at (973) 984-3352.