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Today I wanted to take a look ahead at what the 2011 tax year might have in store for us. There are some important changes looming and the time to start planning for them is now.
Update: In case you haven’t heard, the Bush era tax cuts have been extended. This article has thus been updated to reflect these changes. If you’re interested in figuring your tax liability from the past year, check out the 2010 income tax brackets.
Income tax bracket changes for 2011
In case you weren’t aware, the Bush tax cuts of 2001 and 2003 are set to expire at the end of 2010. Thus, if Congress doesn’t act, the relatively low income tax rates that we’ve been enjoying (hah! enjoying?) will soon be a thing of the past. They will be replaced by the pre-2001 tax brackets.
In other words, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets that we’ve grown accustomed to will be replaced by 15%, 28%, 31%, 36%, and 39.6% brackets. It’s hard to say exactly where the income cutoffs will lie, but if we base the numbers on the 2010 income tax brackets and add 3% for inflation, the 2011 tax brackets might look something like this…
With the extension of the Bush-era tax cuts, this is how the 2011 federal income tax brackets will look:
|Tax Bracket||Married Filing Jointly||Single|
|10% Bracket||$0 – $17, 000||$0 – $8, 500|
|15% Bracket||$17, 001 – $69, 000||$8, 501 – $34, 500|
|25% Bracket||$69, 001 – $139, 350||$34, 501 – $83, 600|
|28% Bracket||$139, 351 – $212, 300||$83, 601 – $174, 400|
|33% Bracket||$212, 301 – $379, 150||$174, 401 – $379, 150|
|35% Bracket||Over $379, 150||Over $379, 150|
Capital gains tax changes in 2011
Beyond the increased federal income tax brackets, the capital gains tax rates will also be changing (and not for the better). The top rate for long-term capital gains will be rising from 15% to 20%, and the 0% rate for those in the lowest tax brackets will be replaced by a 10% long-term capital gains rate.
Here again, the extension of the Bush-era tax cuts means that capital gains tax rates will remain unchanged.
Why worry about 2011 income tax changes?
Note: I’ve left this part intact, but be aware that the changes (or non-changes) outlined above means that 2010 and 2011 are more or less equivalent, and there’s no real need to make wholesale changes dur to looming changes in tax rates.
Since the 2011 tax year is so far off, you might be wondering why we’re even talking about it right now. Well, as I noted above, the time to being planning for things like this is right now – before the changes go into effect as these potential income tax rates have the potential to take a big bite out of your savings account.
What sort of planning should you be doing? I can think of several things off the top of my head. For starters, if you’re in a position to accelerate income from 2011 into 2010, you might want to do so. In many cases this is easier said than done, but it’s worth exploring if you’d like to shield your income from the potentially higher rates.
Also, if you’re anything like me, you may wait until the end of the year to make your charitable donations. If so, then by waiting just a few more days (until January 1, 2011) to write that check, you could net a substantial tax savings. While you’d have to wait longer to claim the deduction, it might be worth it.
Similarly, if you anticipate selling investments to generate cash during 2011, you might consider moving that up to the end of 2010 to get in on the (presumably) lower capital gains tax rates.
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