No Clarity Yet on 2011 Individual Income Taxes

By: Trey Whitt, CPA

The fate of 2011 individual income tax rates is still up in the air, but Congress could take action before the elections to provide clarity to the situation. With no Congressional action, tax rates would revert back to pre-2001 levels; however, the President has advocated keeping the first four tax brackets (10%, 15%, 25% and 28%) intact and increasing the top two brackets (currently 33% and 35%) to 36% and 39.6%.

So what does all this mean to you? In Table 1 below, I have compared 2010 income tax rates to 2011 rates based on two possible scenarios: (1) Congress adopts the tax brackets advocated by the President, and (2) Congress allows the current tax rates to sunset without any action to maintain the lower income brackets advocated by the President. In Table 2, I have applied the three tax brackets to different levels of taxable income to illustrate the differences.

Table 1: A Comparison of Married Filing Jointly Tax Brackets
Married Filing Jointly Income Thresholds
Rates 2010 (Current) 2011 (President Proposal 2011 (No Congressional Action)
10.0% $16,750 $17,150 Not Applicable
15.0% $68,000 $69,700 $58,200
25.0% $137,300 $140,600 Not Applicable
28.0% $209,250 $237,300 $140,600
31.0% Not Applicable Not Applicable $214,250
33.0% $373,650 Not Applicable Not Applicable
35.0% Over $373,650 Not Applicable Not Applicable
36.0% Not Applicable $382,650 $382,650
39.6% Not Applicable Over $382,650 Over $382,650
Table 2: A Tax Comparison Based on Different Levels of Taxable Income
Married Filing Jointly Tax
Taxable Income 2010 2011 (President Proposal) 2011 (No Congressional Action)
$25,000 $2,912.50 $2,892.50 $3,750.00
$50,000 $6,662.50 $6,642.50 $7,500.00
$100,000 $17,362.00 $17,172.50 $20,434.00
$150,000 $30,243.50 $29,955.00 $34,716.00
$200,000 $44,243.50 $43,955.00 $50,216.00
$300,000 $76,781.00 $76,971.00 $85,503.50
$400,000 $110,308.00 $113,595.60 $122,128.10
$500,000 $145,308.00 $153,195.60 $161,728.10
$1,000,000 $320,308.00 $351,195.60 $359,728.10

The President’s proposed brackets deliver roughly the same tax result for married taxpayers with taxable income up to $300,000, but once income reaches the midpoint of the 36% bracket (roughly $310,000), the disparity between the 2010 brackets and the 2011 brackets proposed by the President becomes evident. If Congress allows a complete restoration of the pre-2001 tax brackets, the result is an across the board tax increase.

Other tax issues yet to be resolved are the capital gains and qualified dividends rates and the phase-out of personal exemptions and itemized deductions for high income taxpayers. Right now, the capital gains and qualified dividends rate is 15%, but without Congressional action the capital gains rate will increase in 2011 to 20% and dividends will be taxed as ordinary income subject to the tax rates previously discussed.

Additionally, the phase-out of personal exemptions and itemized deductions of high income taxpayers is repealed for 2010 only. No one expects this repeal to be extended, and thus, a restoration in 2011 of these phase-outs will result in a backdoor tax increase on higher income taxpayers.

Other items that remain unresolved as of this writing are a permanent indexing of the Alternative Minimum Tax exemption to inflation, a permanent solution to the estate tax, and the extension of several popular tax provisions that expired at the end of 2009. Those provisions include the state and local tax deduction, research and development tax credits, and direct charitable contributions from IRAs. Whether Congress will address any or all of these issues in what remains of the legislative session is anyone’s guess.

The fate of 2011 individual income tax rates is still up in the air, but Congress could take action before the elections to provide clarity to the situation. With no Congressional action, tax rates would revert back to pre-2001 levels; however, the President has advocated keeping the first four tax brackets (10%, 15%, 25% and 28%) intact and increasing the top two brackets (currently 33% and 35%) to 36% and 39.6%.

So what does all this mean to you? In Table 1 below, I have compared 2010 income tax rates to 2011 rates based on two possible scenarios: (1) Congress adopts the tax brackets advocated by the President, and (2) Congress allows the current tax rates to sunset without any action to maintain the lower income brackets advocated by the President. In Table 2, I have applied the three tax brackets to different levels of taxable income to illustrate the differences.

The President’s proposed brackets deliver roughly the same tax result for married taxpayers with taxable income up to $300,000, but once income reaches the midpoint of the 36% bracket (roughly $310,000), the disparity between the 2010 brackets and the 2011 brackets proposed by the President becomes evident. If Congress allows a complete restoration of the pre-2001 tax brackets, the result is an across the board tax increase.

Other tax issues yet to be resolved are the capital gains and qualified dividends rates and the phase-out of personal exemptions and itemized deductions for high income taxpayers. Right now, the capital gains and qualified dividends rate is 15%, but without Congressional action the capital gains rate will increase in 2011 to 20% and dividends will be taxed as ordinary income subject to the tax rates previously discussed.

Additionally, the phase-out of personal exemptions and itemized deductions of high income taxpayers is repealed for 2010 only. No one expects this repeal to be extended, and thus, a restoration in 2011 of these phase-outs will result in a backdoor tax increase on higher income taxpayers.

Other items that remain unresolved as of this writing are a permanent indexing of the Alternative Minimum Tax exemption to inflation, a permanent solution to the estate tax, and the extension of several popular tax provisions that expired at the end of 2009. Those provisions include the state and local tax deduction, research and development tax credits, and direct charitable contributions from IRAs. Whether Congress will address any or all of these issues in what remains of the legislative session is anyone’s guess.

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