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Monday
Nov292010

Everyone Needs to Get Ready for the Tax Increases in 2011

As mentioned in our prior article entitled “Here It Comes Again: Tax Increases in 2011”, starting January 1, 2011, the Federal Government will impose a $3.8 trillion tax hike if Congress does nothing to stop the tax increases coming into effect.  This tax increase is not just on the “wealthy”. It will affect most every American who pays income taxes through higher tax rates on individuals, families, and small businesses.  Married couples and parents will especially be subject to higher taxes, and there will be significant tax hikes on investments.  Even the death tax – repealed entirely for 2010 – will be resurrected on January 1, 2011. 

So how will the family budgets of typical taxpayers be affected by these tax hikes?

  • A family of four earning $50,000 per year could pay more than $2,100 in higher taxes.  
  • A single mom earning $36,000 per year could pay over $1,100 more in taxes. 
  • Married senior citizens earning $40,000 per year could pay more than $1,400 in higher taxes.

Here are the details: 

Typical Tax Return #1: Middle-income Family of Four

Filing Status: Married, filing joint return
Children: 2
Adjusted Gross Income: $50,000

 

Without the
2011 Tax
Hike

With the
2
011 Tax
Hike

 Standard deduction

$11,600 

$9,750

 Personal exemptions

$15,000

$15,000

 Taxable income

$23,400

$25,250 

 Tax liability

$2,652

$3,788

 Child credit (non-refundable portion)

$2,000

$1,000

 Total tax

$652

$2,788

 The 2011 tax increase: $2,136

Calculations are based on Joint Committee on Taxation (JCT) estimates of various tax parameters reflecting expected inflation adjustments for 2011.

Typical Tax Return #2: Modest-income Single Parent            

Filing Status: Head of Household
Children: 1
Adjusted Gross Income: $36,000

 

Without the
2011 Tax
Hike

With the
2011 Tax
Hike

 Standard deduction

$8,600 

$8,600

 Personal exemptions

$7,500

$7,500

 Taxable income

$19,900

$19,900 

 Tax liability

$2,373

$2,985

 Child credit (non-refundable portion)

$1,000

$500

 Total Tax

$1,373

$2,485

 The 2011 tax increase: $1,112

Calculations are based on Joint Committee on Taxation (JCT) estimates of various tax parameters reflecting expected inflation adjustments for 2011.  

Typical Tax Return #3: Married Senior Citizens

Filing Status: Married, filing joint return
Children: 0
Adjusted Gross Income: $40,000, including $5,000 in dividends[1]  

 

Without the
2011 Tax
Hike

With the
2011 Tax
Hike

 Standard deduction

$13,800

$13,800

 Personal exemptions

$7,500

$7,500

 Taxable income

$18,700

$18,700

 Qualified dividends    


$5,000 taxed at 0%
(special rate for taxpayers
in the 10% or 15%
brackets)

$5,000 taxed at 15%
(ordinary income
rate)

 Total tax

$1,370

$2,805

 The 2011 tax increase: $1,435

Calculations are based on Joint Committee on Taxation (JCT) estimates of various tax parameters reflecting expected inflation adjustments for 2011.

While the effect of these tax increases on any particular taxpayer’s family budget will depend on that

taxpayer’s specific facts and circumstances, these typical tax returns make clear that this tax hike is not limited to just the “wealthy”.

As these examples show, married couples and taxpayers with children will be hit particularly hard because of the re-imposition of the marriage penalty and the reduction in the child credit scheduled for January 1, 2011.

Proper Estate and Asset Protection Planning are more important now in anticipation of the tax increases than they have been in 8 years. Planning now may save you and your family taxes in the future. If we can assist you with these matters give me or one of our other Estate Planning attorneys a call.

_______________

[1] A recent study by Ernst & Young found that 65% of dividends were on tax returns with total income under $100,000 and 36% were on returns with total income under $50,000. Also, based on 2008 data The Tax Foundation, confirmed that seniors are especially reliant on dividend income.  Even though they filed roughly one-third of tax returns showing dividend income, seniors earned just under half (48%) of all dividend income.

Partially adopted from the Tax Tracker, Part II