Update on Income and Estate Tax Planning for 2011

HNW Elder Law, Estate Planning, Will Contest and Probate Litigation

By:  Fredrick P. Niemann, a New Jersey Estate Tax Planning & Estate Planning Attorney

At the time this blog is written, no Congressional action has yet been taken regarding the expiration or “sunset” of the so-called “Bush tax cuts.”  If no action is taken, several things will happen for 2011, including the following:

• Replacement of the current 35 percent maximum marginal tax rate on ordinary income with two top income brackets taxable at 36 and 39.6 percent (with the 36 percent rate kicking in for married taxpayers filing jointly somewhere between $200,000 and $250,000 of taxable income);
• Elimination of the current 25 and 33 percent income tax rates; and the return of the 31 percent rate; and
• Elimination of the current lowest income tax rate bracket of 10 percent, resulting in a 15 percent lowest rate.

For long-term capital gains, the maximum rate will increase from 15 to 20 percent and the 15 percent marginal income-tax bracket will increase from the current rate of zero to 10 percent.  Remember, though, that the lower maximum rates on capital gains apply only to long-term gains- gains from the sale of assets held for more than one year.  Net short-term capital gains are taxable at ordinary tax rates.

With regard to dividends, the situation is different.  For 2010, tax rates on long-term capital gains apply to qualified dividends.  Without Congressional action, dividends will be taxed in 2011 at ordinary income tax rates (hence, taxable up to 39.6 percent) and will no longer receive any preferential tax treatment on individual tax returns.

The big mysteries at this point are: (1) will Congress act to alter the sunset scenario and (2) what will be the resulting tax treatment of Americans moving forward in 2011 and beyond?  One interesting and unusual aspect of this situation is that everyone seems to want to do something, i.e., retain certain elements of the current expiring provision. The problem is that there is wide disagreement as to exactly what provisions should be extended.

If you have any questions concerning Estate Tax Planning, please do not hesitate to contact me at (888) 800-7442 or email at fniemann@hnlawfirm.com/.  I welcome your inquiries.

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