It is almost a certainty that tax rates across the board will begin increasing come January 1, 2011. Ordinary income tax rates could increase 3-5% for those in the 31% to 39% tax bracket, the dividend tax could jump from 15% to 39.6%, & long-term capital gains tax could go from 15% to 20% or even higher. As we head closer to January 1st, it is becoming more and more important to start accelerating income and deferring deductions.
Seek a Larger Bonus in 2011
Negotiating a bonus can be a difficult task but you may have another talking point when you discuss compensation with your superior. Whatever you normally say to negotiate your bonus which is effective, continue to do so. But, also mention that you will be impacted by taxes more so in 2011 then in 2010 & would appreciate a larger bonus this year. Employers may work with you & it can’t hurt to ask.
Capital Gains Tax
Generally, it is not a good idea to trade around investments because of tax rate changes. However, if you have some fairly LARGE unrealized gains, you may want to consider selling those investments before year end as opposed to waiting until 2011 when tax rates are higher. If you had a $300,000 long-term unrealized gain investment that was realized now where long-term capital gains tax rates are at 15% vs. possibly 20% next year, you would be saving yourself $15,000. This is just an example. Also, keep in mind that you need to net capital gains and losses together at the end of year to figure out your capital gains tax liability, if any.
On the flip-side, if you have net capital losses from previous years, the value of those will only be higher when tax rates increase, so hold off on using those losses until tax rates increase.
Dividend Taxes
As of now, the Bush tax cuts are set to expire which means that qualified dividends will be taxed at ordinary income tax rates. More specifically, a taxpayer at the 28% ordinary income tax bracket (single: $82.4K-$171.85K; joint: $137.3K-$209.25K), will now be taxed 28% on dividend income. As a reminder, the current dividend tax rate is 15%, so it would be going up 13% to 28% for this tax bracket. For the highest income earners, the dividend tax rate could be 39.6%! Yikes! BUT, and this is very important, lawmakers may step in & order a provision similar to what the Obama administration is advocating; limiting the dividend tax rate to a more manageable 20%. Having said all of that, there is still something that C-Corporation business owners can do now. They can distribute more dividends now in 2010 as oppose to waiting until 2011 when tax rates will likely be higher.
Ordinary Income
Beginning in 2011, ordinary income tax rates are set to go up ~3-5% for taxpayers currently in the 31%-39.6% tax brackets. Taxpayers should start building a strategy of deferring deductions to plan for the imminent tax rate increase. Deductions are more valuable to the taxpayer if used in 2011 when tax rates will likely be higher than in 2010.
More Tax Questions?
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