TAX CHANGES AHEAD
By Stephen Smith
There is still considerable uncertainty surrounding the fate of current income tax rates. The state of transfer tax law in 2010 remains unclear. The federal estate and generation skipping transfer taxes are currently suspended, with a modified carryover basis rule applying to 2010 decedents. The estate tax is scheduled to return in 2011 with a $1 million exemption at a rate of 55%, compared to the $3.5 million exemption that was in effect for 2009 with a top tax rate of 45%. Ordinary income tax rates enacted by Congress in 2001 are scheduled to expire at the end of this year and revert back to their pre-2001 levels meaning an increase of between 3 and 4.6 percentage points in each bracket. Taxpayers in the top bracket would pay a marginal rate of 39.6%, and the 10% bracket would disappear, bumping the lowest earner to the 15% bracket. As with income tax rates, the tax rate on long-term capital gains and dividends is scheduled to revert to pre-2003 levels in 2011. That means that next year the capital gains rate would increase to 20% from the current 15% for middle and upper income taxpayers. The current 0% rate for taxpayers in the lowest brackets would jump to 10%. All dividend income currently taxed at 15% would revert to being taxed as ordinary income.
To date Congress has not resolved these tax issues, but hopefully it will pass legislation this Fall. With mid-term elections looming, legislators may duck the issue altogether and let the tax laws revert back to their previous levels. Failure to act does raise a concern that it will halt the decline in the unemployment rate. According to the Treasury department, two-thirds of all flow-through business income is taxed at the two top rates. More than two million of the taxpayers in the top two brackets are small business owners. This means that approximately one-third of all business income will experience a tax increase. From a market perspective, it would be a mistake to let the tax cuts expire.
Its important to point out that the present pay-as-you-go law requires Congress to offset the cost of extending the tax breaks for upper-income workers, but exempts from the pay-as-you-go rules the current tax cuts for those who earn less than $200,000.
At Trust Company of the Ozarks we always consider the tax ramifications on your investments and we are monitoring this situation very closely. As we get more insight into the new tax laws, it may be necessary to realign your portfolio in light of these changes.