As taxpayers, we’ve had a lot to be thankful for over the last nine years.
We have enjoyed the benefits of lower tax rates and special tax credits for individuals, small businesses, estates, trusts and other business entities. Many of these low rates and special credits were part of the initial passage of the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA). Also, more than 25 major tax law bundles have been passed by Congress and signed into law by the residing president.
But now these tax relief provisions face an uncertain future. Many are scheduled to expire at the end of the year. While lawmakers have done a lot of talking about extending these provisions, they haven’t done it yet. At the time of writing this article, Congress has just adjourned and lawmakers are on the campaign trail for the November 2010 election.
This is not the normal year-end tax planning season that we enjoyed during the last several years. We face a number of issues that may affect our individual financial/tax situations.
For starters, we could all see higher income tax rates. There are changes from the lowest 10 percent tax bracket (which would rise to 15 percent) to the highest tax brackets of 33 percent and 35 percent (increasing to 36 percent and 39.6 percent respectively).
Unless lawmakers take action, the marriage penalty (which had finally been rectified) will revert back to its pre-2001 basis in the standard deduction area. Although the standard deduction is not used by everyone as many taxpayers itemize their deductions, it will affect those who itemize their deductions as the itemized deductions phase-out rule will also return. This phase-out could eliminate up to 80 percent of affected itemized deductions for higher-income individuals. The phase-out covered some high dollar deductions such as mortgage interest, state and local taxes and charitable donations.
Capital gains tax rates have enjoyed the benefit in both stock/mutual fund sales of a lower 15 percent maximum tax rate. Without congressional action this rate will increase again to 20 percent (or 18 percent on gains from assets held over five years). Dividends will no longer be taxed at the preferable capital gains rate, but as ordinary income. This means that dividends could be taxed upward to 39.6 percent.
On another note, the Administration has proposed bringing back the phase-out rules, but change them to reflect a new AGI threshold. For married filing joint this threshold is $250,000, for unmarried individuals it is $200,000 (another example of the marriage penalty) and for married filing separate a threshold of $125,000.
These are just a few examples of the major items that may affect your tax situation if left unresolved by lawmakers. For more information on provisions scheduled to expire by the end of 2010, check out a recent overview published by Thomson Reuters and the Tax Foundation.Don’t wait to put your year-end tax planning strategies into motion. Be sure to review the tax deductions and credits that apply to you and discuss the best course of action with your tax advisor and First Command Financial Advisor.
Bob Evart is director of First Command Tax Services, the exclusive tax preparation services of First Command Financial Planning, Inc. (Member SIPC, FINRA). This article is provided for information purposes only and should not be considered tax or legal advice. Should you require tax guidance specific to your situation, please contact a tax or legal professional.