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Tax rates in turmoil

As 2010 ends and you prepare your tax returns, some taxpayers are confronted with the reality that scheduled increases in individual income tax rates, significant reductions in many popular tax help incentives and more changes will occur when the calendar reads 2011. One year ago, it appeared highly unlikely that taxpayers would be faced with such uncertainty. Today, that uncertainty is generating many questions and few answers about tax relief. Get in touch with your tax help service representative if you have any questions.

Temporary tax cuts may require tax help

Nearly 10 years ago, Congress enacted the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which set in motion a gradual reduction in the individual income tax rates. In 2003, Congress passed the Jobs and Growth Tax Relief Act, which gradually reduced capital gains and dividend tax rates. When these laws were enacted, many lawmakers, tax help service professionals, businesses, and individuals assumed that Congress would either further extend the tax relief incentives or make them permanent before their expiration after 2010. To date, Congress has not acted; causing great uncertainty for tax help preparations and tax returns.

Impact on individuals in Fremont CA, Union City CA and Hayward CA who need tax help

The current individual tax rates of 10, 15, 25, 28, 33, and 35 percent are scheduled to expire after December 31, 2010. In their place, the pre-EGTRRA individual tax filing rates of 15, 28, 31, 36, and 39.6 percent will apply to tax filing years beginning after December 31, 2010, unless Congress acts to change this result that is otherwise required under the Tax Code. On top of these increases, the Making Work Pay credit, which further reduced income tax withholding for wage earners in 2009 and 2010, will expire after 2010.

Fremont, Union City and Hayward residents or any individuals with capital gains and dividend income will also see significant changes after 2010. If you require tax help, have your tax services representative or tax relief service go over these changes with you. The maximum rate of tax on the adjusted gain of an individual will revert to 20 percent (except 18 percent for gains on assets held over five years). Qualified dividends received by an individual for tax filing years beginning after December 31, 2010 will be taxed at ordinary income tax filing rates. Additionally, the current zero percent rate for capital gains for taxpayers in 10 and 15 percent tax brackets will expire to be replaced with a 10 percent rate (except eight percent for gains on assets held over five years). Consult with your tax services representative if you need tax help.

Individuals liable for the alternative minimum tax (AMT) will also be hit with some surprises. Have your tax help preparer go over these surprises with you. Higher exemption amounts as part of an AMT “patch,” routinely enacted in past years, have languished in Congress. Under current law, the exemption amounts for 2010 and again for 2011 are $33,750 for unmarried individuals, $45,000 for married couples filing a joint taxes returns and surviving spouses, and $22,500 for married individuals filing a separate return. Comparing these amounts to higher exemption amounts for 2009 shows how drastic the reductions are. Married couples may need tax help from their tax services professional. For 2009, the exemption amounts were $46,700 for single individuals, $70,950 for married couples filing joint taxes returns and surviving spouses, and $33,475 for married couples filing a separate tax return.

Further down the road, a new 0.9 percent Medicare tax on earned income above $200,000 ($250,000 for married couples filing a joint return) and a 3.8 percent Medicare tax on the lesser of an individual’s net investment income for the tax year or modified adjusted gross income in excess of $200,000 ($250,000 for married couples filing a joint return) are effective for taxes returns years beginning after December 31, 2012. All of these events will, unless altered by Congress, will significantly change the dynamic for many taxpayers.

Expiring incentives

After December 31, 2010, many popular but temporary tax breaks for individuals will revert to their pre-EGTRRA levels, unless Congress acts to prevent this result. One of the incentives taking the hardest hit is the child tax credit. Have your tax services preparer help you with this. For the 2010 tax filing year, the child tax credit is $1,000 for each eligible child. After December 31, 2010, the child tax credit is scheduled to plummet to $500 per qualified child. Other enhancements to the child tax credit also will expire after 2010.

Impact on businesses who need tax help

Business owners who are taxed on their business income at the individual rates, such as sole proprietors, will also be hit with a tax increase if the scheduled pre-EGTRRA rates return. The top rate will increase from 35 percent to 39.6 percent for tax filing years beginning after December 31, 2010.