Taxes: Planning Ahead For 2010 And 2011
Here are some important tax developments that you can expect for 2010 and 2011:
The death tax: When it comes to the death tax, probably nothing could less likely be predicted or planned for. By far the death tax can easily become ones largest expense provided an individual’s gross estate is at least $3.5 million. The 2009 death tax exclusion, however, will be set to unlimited in 2010, which is another way of saying that the death tax will be repealed.
Sunset of the death tax is a holdover from the now infamous Bush administration tax policy, which many argue benefits only the wealthy. However, given that the same law requires the death tax to be reinstated in 2011 at pre-2004 exclusion rates of only $1 million, this can hardly be seen as benefiting the decedent’s estate or the beneficiaries. Aside from the tax burden, which alone is responsible for raising more than $800 billion annually in tax revenues, often beneficiaries are forced to liquidate illiquid estate assets to free up cash in order to pay the death tax. If these assets are held in real estate, then this could pose a serious problem if current real estate market trends continue on the downside for the foreseeable future.
One can logically expect continued volatility in the way the death tax is applied. The Obama administration has already tinkered with in the Fiscal Year 2010 Budget Proposal in which a footnote to the proposal assumes that Congress will cancel the repeal and make the death tax permanent. Probably the best advice anyone could be offered is to plan for all possible contingencies regardless of the size of the estate. Preparing a living trust has probably never been more important than now given the uncertainties of the death tax. A spousal residuary trust should be carefully considered as well. Seeking trust and estate advice can often result in peace of mind.
Alternative minimum tax: The exemption levels drop to $45,000 for married filing jointly from $70,950 in 2009. It drops to $33,750 for singles and heads of household from $46,700, and from $35,475 to $22,500 for married couples filing separately. This translates into millions of additional taxpayers, who are expected to be subject to the AMT. The best advice would be to pay careful attention to the level of your income as well as the tax preference items, which are added back for alternative minimum tax purposes. Make sure that you don’t fall into the AMT for 2009, or else you might wind up owing additional taxes which you had not planned for. Important items to consider in planning for the AMT would be whether you exercised incentive stock options or paid a lot of state taxes. However, so far interest from private activity bonds is still exempt from the AMT through 2010.
Sales tax deduction for new vehicles: In 2010, the ability to deduct sales tax on new vehicle purchases will no longer be available. New car buyers have until the end of 2009 in which to take a deduction for the sales taxes by adding it to your standard deduction. The period of 2-16-09 to 12-31-09 is covered under the law. If you are single and your adjusted gross income is over $125,000, the deduction is phased out. It is phased out at $250,000 of AGI for marrieds. Sales taxes on the purchase price up to $49,500 qualifies for the deduction. Beginning in 2010, you can still deduct sales taxes on a new car purchase provided that you itemize deductions and do not deduct state income taxes.
Other things to consider: Unless there are any changes coming from Congress, in 2011 both the individual tax rates and the capital gains tax rates are supposed to go back to the rates which were in effect prior to 2001. This means that the top individual income tax rate will go back to 39.6%, and the capital gains tax rate is set to return to 20%, up from 15%, and in addition dividends will be taxed at the highest ordinary tax rate. Also, the Section 179 expense deduction gets cut way down from $250,000 where it presently stands to only $25,000 in 2011. One positive development is that the domestic production activities deduction increases in 2010 to 9% of qualified business net income. Also, the first-time homebuyer credit expires on November 30, 2009. As long as you take the credit in 2009 and you do not sell your house within three years of buying it, then you will not have to repay the credit.
