What Will Happen to Your Income Taxes in 2011?

by Carter Ruml on July 24, 2010

On the estate tax front, it’s been a Macbeth/Faulkner fortnight in Congress – full of sound and fury, signifying nothing. Meanwhile, however, the clock is also ticking on expiration of the 2001 and 2003 Bush tax cuts, potentially affecting many private clients and business owners. To that end, readers may be quite interested in the link Paul Caron at TaxProfBlog posted to a useful online calculator from the Tax Foundation (a self-described nonpartisan research group in Washington, DC… that actually does seem to be reasonably nonpartisan).

The calculator, available directly at MyTaxBurden.org, allows the user to compare tax results under any given level of income, dependents, and deductions for three scenarios: 1) full expiration of the Bush tax cuts at the end of 2010; 2) the Bush tax cuts are made permanent; and 3) the Bush tax cuts expire, and the Obama administration proposals are adopted.  For a great chart that compares various income tax parameters under the three scenarios, visit here. To get a quick sense of what is at stake, review the tax bracket chart here.  The “married filing jointly” bracket schedule is below:

Filing Status Pre-Bush Tax Policy (a) Bush Tax Policy (b) Tax Policy Under Pres. Obama’s Proposed Budget (c)
Tax rate On income between Tax rate On income between Tax rate On income between
10.0% $0-17,050 10% $0-17,050
Married Filing Joint and Widow(er) 15.0% $0-57,850 15.0% $17,050-69,300 15% $17,050-69,300
28.0% $57,850-139,850 25.0% $69,300-139,850 25% $69,300-139,850
31.0% $139,850-213,100 28.0% $139,850-213,100 28% $139,850-235,550
36.0% $213,100-380,500 33.0% $213,100-380,500 36% $235,550-380,500
39.6% $380,500+ 35.0% $380,500+ 39.6% $380,500+

A quick glance at the table above shows that compared to extension of the Bush tax cuts, the Obama Administration’s proposals disadvantage married joint filers with taxable income above $235,550.  The only substantial fear for taxpayers with taxable incomes below $235,550 is Congressional gridlock that leads to full expiration of the Bush tax cuts (the complete list of the tax provisions that will expire if no action is taken is here).

In a separate report by William Ahern, however, the Tax Foundation forecasts that full expiration of the 2001/2003 Bush tax cuts is unlikely:

The probability that Congress will just let all those tax cuts expire at the end of 2010 is small. The result would be a massive tax hike on middle-income people because the Bush tax cuts have been worth about $2,200 in tax savings each year for the median family of four.

The most likely scenario is what President Obama has outlined in his budget: that the majority of the Bush tax cuts will be kept, but the ones that benefit couples who earn over $250,000 and singles making over $200,000 will either be allowed to revert to their higher, 2001 levels, or they will be raised in some other fashion.

Readers, although our primary focus for now is transfer taxes and this dramatic year when estate tax repeal actually happened, we’ll continue to monitor the income tax situation, too, and keep you posted.

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