If you and your spouse are middle-income retirees making less than $250,000 a year from regular sources of income – such as Social Security, interest, dividends, pensions, IRAs and 401(k) distributions – you could soon wind up in an income tax bracket intended for the rich.

A bump up to the 36 percent or 39.6 percent tax bracket is possible if Congress passes President Barack Obama’s proposed budget for the 2011 fiscal year and makes no provision to reduce the risk of unintended consequences.

How?

If your adjusted gross income (AGI) rises above $250,000 in 2011, thanks to large long-term capital gains triggered by the sale of assets bought long ago at lower prices. Those assets could include real estate, stocks, bonds, mutual funds, along with capital gains distributions from mutual funds in taxable accounts.

The impact of large capital gains could cause you to be “wealthy” in the eyes of the administration because it chose a $250,000 AGI, a measure of total cash flows from income and asset sales, as the point at which it divides the universe of joint return filers into “the wealthy” and everybody else. That $250,000 AGI hurdle for married individuals filing joint returns also applies to surviving spouses. For single individuals, it’s $200,000.

Why should you care?

Most importantly, if your taxable income – that is, AGI less deductions and exemptions– would top $237,300, all of it except qualified dividends and net long-term capital gains could be taxed at least at 36 percent after this year. If your taxable income would rise above $382,650, the tax rate on all but dividends and capital gains could rise to 39.6 percent for joint filers, surviving spouses, and individuals.

You should also care because:

• Your long-term capital gains and mutual funds; capital gains distributions could be taxed at 20 percent, instead of 15 percent, the current rate, which the proposed budget retains for those with an AGI of less than $250,000  and, therefore, in the 28 percent and lower brackets.
• Dividends could also be taxed at 20 percent instead of 15 percent.
• You could be more limited than taxpayers in lower brackets in subtracting deductions and personal exemptions to determine your taxable income. That, of course, could also increase your income tax bills.

Here are some steps to consider to maximize your after-tax income in the years to come and prolong the life of your nest egg in the face of higher taxes.

First, point out to your Senators and Representative, if you see them during their recess, how middle income retirees like you could be impacted by the proposed budget: taxed, as if you were really wealthy.

Second, keep up with Congress’s debate on the budget after its return in mid-September so that you will know whether to phone or send your members additional comments or whether it appears that Congress would provide at least temporary relief by extending current tax rates for ordinary income, dividends, and capital gains beyond their scheduled December 31 “sunset.”

Third, if it appears that Congress will approve the President’s budget, consider whether it might be sensible to sell some of your investments or even your house before December 31 to lock in the 15 percent long-term capital gains tax rate. Unless you really need to sell despite market conditions, be sure to think about how long you might want to keep your securities and house if tax considerations were not a factor.

In any event, would it not make sense to urge the President, the Treasury, and Congress to take a cue from another government agency which takes a different, more rational approach to measuring what people make – and exclude long-term capital gains from adjusted gross income for the purpose of determining the income brackets to which taxpayers are assigned?

The Census Bureau, which surveys households for the Bureau of Labor Statistics to develop the estimates released in their Current Population Survey, excludes long-term capital gains from household income estimates for an undeniable reason: it considers them to be one-time payments.

Understandably, the Census Bureau defines household income as routine, repeated receipts of money as income as opposed, say, to borrowings or an inheritance. You probably do, too. Why wouldn’t the President and the rest of his administration? Why shouldn’t Congress?

Dan Greenshields is president of ShareBuilder. The opinions expressed here are his own.

Millions of children are getting ready to head back to school. Their parents have a long to-do list before them as well. My wife and I have had to purchase school supplies and new clothes, schedule haircuts, and make sure the kids have finished off their summer reading lists.

Unfortunately, this flurry of activities causes many parents to lose sight of another critical component of any back-to-school checklist: financial planning for our children’s future.

College is one of the best ways to increase a child’s chances for success. But it’s getting more expensive every year. In 2009, private school tuition rose 4.4 percent, to an average of $26,273, according to the College Board. While public school is less expensive, its cost is rising even faster – last year, the average tuition at a public, in-state university rose 6.5 percent, to $7,020.

Planning ahead for this expense will ensure that it doesn’t sneak up on you. Whether you live in Seattle or San Antonio – and whether you expect your child to go to a big state school or a tiny liberal arts college – such planning begins with an assessment of your present situation.

The first questions are easy: How old is your child? And have you started to save?

In the blink of an eye, this year’s fifth graders will be headed off to college. So the sooner you begin saving, the better.  I speak from experience.  My son is 11 and my daughter is 9. College and the costs – times two – that come with it are just around the corner.

While many people focus on 529 plans, other straightforward savings vehicles shouldn’t be overlooked. Both Education Savings Accounts (ESAs) and custodial accounts can be opened with most brokerages using the child’s Social Security number. Yet, each account offers different advantages.

Let’s start with ESAs. You can contribute up to $2,000 per beneficiary in these generally no-fee accounts each year until your child turns 18 years old. ESAs are like individual retirement accounts for educational expenses. They give the account holder choices about how the funds within them are invested – perhaps in stocks, bonds, ETFs or mutual funds, for instance – and how those funds are eventually disbursed.

ESAs offer several advantages. Although contributions aren’t tax-deductible, funds in the account grow tax free until distribution. Education expenses are broadly defined.  Parents can make tax-free withdrawals to pay for qualified expenses – like books, computers, and other school supplies.

Higher-income earners –  singles whose modified adjusted gross income is over $110,000 and couples whose modified adjusted gross income is more than $220,000 – aren’t eligible. But everyone else can easily open an ESA at almost any financial institution that handles investment accounts.

Custodial accounts are another option – especially for parents who don’t qualify for an ESA. You can open one on behalf of your child regardless of how much money you make or how much you plan to put in each year. There are no contribution limits and money can be withdrawn at anytime and for any purpose as long as the child on the account benefits.

These accounts also qualify for the annual $13,000 federal gift tax exclusion, which can help reduce your estate tax burden while keeping assets within your family.

Custodial accounts are designed to give children a financial head start – by law, they can only be used to benefit the child whose name is on the account. If you start early enough, those benefits can be significant. If you put $200 a month into an account that earns 8 percent annually, you’ll have an account worth $36,000 after a decade. Over twenty years that account could grow to over $116,000.

Of course, early planning is key. And the benefits of savings aren’t just monetary.

Talking with your child about his or her ESA or Custodial account will help instill good financial values – no small thing in a country where high school seniors two years ago answered fewer than half of the questions on the Jump$tart Coalition for Personal Financial Literacy’s test of basic financial knowledge correctly. There’s no better way to put your child on the road to financial literacy than by introducing him to the power of compound interest firsthand.

With college costs rising at eye-popping rates, it’s more important than ever to start saving for big educational expenses as soon as possible – even if your children are just starting preschool.

No parent – myself included – wants their child to start the school year unprepared. But your child’s back-to-school prep will not be complete without thoughtful consideration of how you can invest in his or her educational future.

Rick Ashburn (pictured below) is a certified financial planner and managing partner of Creekside Partners, based in Lafayette, Calif. The opinions expressed are his own.

For many state and local governments, the new fiscal year has already begun. Yet they are operating without an adopted budget. The news will likely get worse before it gets better.

After several decades of endless revenue increases, the governmental sector is at long last faced with a titanic clash of demands on its traditional largesse. Voters want schools and nice roads and parks and such, along with low taxes. And they vote. Employee unions want pay and pensions and health benefits. And they vote – in a large block. We do not know which group will get what they want.

But our job is to manage investments for our clients. Our clients own a lot of municipal bonds, so we turn our attention from the political to the pragmatic. Municipal bonds represent promises. As we know, our various state and local governments have made a lot of promises, and some of those promises are going to get broken. Our task is to ensure that we don’t own any broken promises.

I have worked in the muni bond world for 25 years, as a consultant, investment banker and financial adviser. I’ve been on both the “sell side” and the “buy side.” I learned a few key lessons early on. Most importantly, I learned that there exists an astonishing variety of bonds called “municipal.” A vast quantity of them has almost nothing to do with what we generally consider municipal functions and services. The bond might be issued by a municipal entity and carry its name in the title, but the revenue stream might be derived from a private business enterprise.

An example is a bond issued at the height of the housing bubble in 2006 by something called the Independent Cities Lease Finance Authority. This entity is a California joint powers authority whose nominal members include nine cities in south Los Angeles County, but which doesn’t actually have any staff and does not conduct regular public meetings. Its address is a post office box in Palmdale, Calif.,  in north Los Angeles County – nowhere near either the project or the member cities.

The $39.9 million in bonds were used to acquire a 312-unit mobile home park in San Juan Capistrano, the town in Orange County to which the swallows return each spring. The park was appraised for $38 million, for a 105% loan-to-value ratio. And you thought subprime lenders were naïve! The bonds will be repaid not by any municipal entity or revenue source, but entirely and solely from rental income in the mobile home park.

While this bond might be issued by a governmental entity and its interest payments might be tax-free, this is most certainly not a municipal bond under the usual understanding. This is a loan to a private entity that operates mobile home parks. Somehow, Standard & Poor’s saw fit to assign a triple-B rating to a $29 million slice of this bond – an investment-grade rating usually reserved for actual municipal entities that receive actual tax or utility revenues. The annual payment on the $39.9 million loan is over $2.5 million per year. The park has been generating net revenues of around $1.8 million in recent years, before it had loan payments to make. Can you do the math with me here?

If you or I went to S&P and asked it to rate a conventional loan like this to a 312-unit mobile home park, they would laugh us out of the building. But, slap “municipal” on the title of the loan and they suddenly think it’s a suitable investment for widows and orphans.

And therein lies the second key lesson I learned early on: For the most part, the big bond rating agencies really don’t know what they’re doing. I have never relied on their ratings when analyzing a bond. There are a host of “high yield” municipal bond mutual funds out there offering tempting high yields. But beware: those funds are loaded with bonds like this mobile home loan. Bonds for hospitals, low-income housing, port facilities, pollution control add-ons to oil refineries and all sorts of bonds that are really loans to operating companies (non-profit and for-profit).

At the other end of the municipal bond credit spectrum are bonds of the genuine public-purpose type: Bonds which funded school buildings, water systems and roads that are operated by genuine municipal governments with actual physical addresses and elected bodies that meet regularly.

Without conducting a graduate class in muni bond credit analysis, I can give you a few simple pointers that might save you some grief. First, look for bonds whose proceeds paid for some type of project that you agree is of the classic public-purpose type, including  schools, highways and water systems. Second, look for bonds that have been approved by voters, or that are secured by revenues from an essential service. Some bond revenue sources are subject to an annual appropriation process, meaning that the elected officials decide each year whether or not they want to make the payments. Instead, voter-approved tax bonds – known as general obligation bonds in most states – will provide you with payment whether the politicians like it or not.

An example of this type of bond is one issued by the school district in Irvine, Calif. This $96 million bond issue is secured by special taxes authorized by qualified voters in 1985. The taxes are paid by over 10,000 separate taxpayers, and the land securing these taxes is valued on the county assessment rolls at more than $10 billion. S&P rated this bond issue single-A, only a few gradations higher than the mobile-home park bond described above. Under my own credit rating criteria, I place a higher probability on Vladimir Putin living in the White House than this Irvine school district bond defaulting.

You will continue to read about the extreme financial stress that our state and local governments are experiencing. Those stresses are not unlike what the private sector is experiencing and will lead some government entities somewhere to default on debt. When the ensuing panic drives down muni bond prices, you will be able to find gold among the rocks by buying genuine voter-authorized, tax-supported bonds whose risk of default is very nearly zero.

This column was written by William R. Bischoff, a certified public accountant in Colorado Springs, Colorado for PPC, which is part of the tax and accounting business at Thomson Reuters. The opinions expressed here are his own.

The so-called Bush tax cuts (from legislation enacted in 2001 and 2003) are scheduled to expire at the end of this year. But you may not understand the full extent of what is in store if Congress simply sits back and allows the expirations to occur without making any changes.

Here are some highlights:

Higher income tax rates

Some of you may believe that only individuals in the top two federal income tax brackets will face higher rates when the Bush cuts go bye-bye. Not true! Unless Congress takes action and President Obama goes along, rates will automatically go up for everyone who pays taxes — not just “the rich.”

Specifically, the existing 10 percent bracket will go away, and the lowest “new” bracket will be 15 percent. The existing 25 percent bracket will be replaced by the “new” 28 percent bracket; the existing 28 percent bracket will be replaced by the “new” 31 percent bracket; the existing 33 percent bracket will be replaced by the “new” 36 percent bracket; and the existing 35 percent bracket will be replaced by the “new” 39.6 percent bracket.

My take: The Administration has pledged to keep the three lowest brackets (the 10 percent, 15 percent, and 25 percent brackets) in place. The 28 percent bracket would be expanded to accommodate unmarried taxpayers with income (whatever that is determined to mean) below $200,000 and joint filers with income below $250,000. Only taxpayers with income above those levels would be affected by the new 36 percent and 39.6 percent rates. However, Congress must make changes, and the president must go along for these things to happen.

Right now, that’s looking more problematic than a few months ago, and it now appears that Congress won’t even bring up the subject until sometime after returning from its summer recess in August. The only thing we know for sure is that tax rates will go up for everyone if Congress sits on its hands.

The marriage penalty will get worse

The Bush tax cuts put a relatively favorable framework for married individuals in place to reduce the so-called marriage penalty, which can cause a married couple to pay more federal income tax than if they were single. Note that the marriage penalty still exists for many married couples, but it’s not as harsh as before the Bush tax cuts. However, unless Congress makes changes and the president goes along, the marriage penalty will automatically get worse when the Bush tax cuts expire.

Currently, the standard deduction for some married couples is as much as 200% of the amount for singles. Starting next year, the new lowest bracket of 15 percent for married filing joint (MFJ) couples will be only 167 percent as wide as the 15 percent bracket for singles and the new standard deduction for married couples in other brackets – as well as those who file taxes separately — isn’t as generous.

My take: Presumably, the Administration’s pledge to keep things the same for lower and middle-income taxpayers includes extending the Bush tax cut elements that reduce the impact of the marriage penalty. However, extending those elements would require Congress to make changes and the president to go along. Will it happen? We don’t know, and neither does anyone else.

Higher capital gains and dividends taxes for all

Right now, the maximum federal rate on garden-variety long-term capital gains and qualified dividends is 15 percent. Starting next year, the maximum long-term capital gains rate will increase to 20 percent (or 18 percent on gains from assets held for over five years). Dividends will once again be taxed at ordinary income rates. So, the maximum rate on dividends will balloon to a whopping 39.6 percent.

My take: The Administration has repeatedly said the current 0 percent and 15 percent rates on long-term capital gains and qualified dividends will be left in place except for married couples with income above $250,000 and unmarried individuals with income above $200,000.

For that to happen, however, Congress must take action and the president must go along. A few months ago that looked likely, but now it looks more problematic. In particular, we think the odds are rising that dividends will once again be taxed at ordinary rates (of up to 39.6 percent), starting next year. We hope we are wrong.

In addition to these changes, both the itemized deduction and personal exemption phase-out rules will return with a vengeance. But current versions of the child tax credit, earned income credit, dependent care credit, and adoption credit are also likely to be continued.

Stay tuned for developments, but don’t hold your breath. Our Washington politicians don’t seem to be in a big hurry to resolve the many tax uncertainties that we have summarized here. Even worse, it appears the odds are increasing that we may not see resolution until after the November election. Good grief!

As the SEC prepares to begin its six month evaluation of the current rules governing registered investment advisors and brokerage firms, I hope that it takes a nuanced view of reality. Given the array of services, business models and client relationships that need to exist, I strongly believe that imposing a strict fiduciary standard on every firm and individual, in all circumstances, would be a big mistake.

It is important to distinguish sales efforts, the execution of transactions and the brokering of trades from the giving of advice. Imposing a fiduciary duty (putting the client’s interest first) is unrealistic in the sales environment or when brokering an investment between two customers, one a buyer and one a seller. Where both parties are clients, which client’s interest must the financial institution put first?

A non-fiduciary sales environment exists in all economic realms. We rely on consumers’ natural skepticism, access to alternatives, broadly available factual information, and a increasing flood of internet-based opinion to discipline price and quality in virtually everything else we might buy. Why can’t we simply apply caveat emptor to all financial services?

What makes many financial services unique is the industry’s rapid pace of innovation and the unavoidable uncertainty about the future outcomes its services are designed to address, combined with the low level of financial sophistication that afflicts many consumers.

A variable rate, interest-only mortgage, for example, can be a wonderful device for a client with a long horizon on ownership of the property, the discipline to invest (not spend) the cash flow savings, and the financial depth to withstand occasional interest rate spikes. That same device can spell disaster for a client with thin resources, no investment plan, and who must or chooses to sell the property early in the term. The solution, in this example, is certainly not to ban this form of mortgage, or to make any discussion of it be fiduciary in nature, but to make sure that advice about a specific client actually using it be rendered in a fiduciary context.

Disclosure of potential conflicts and “suitability” requirements already exist. Criminal laws and civil remedies for fraud or deceit are already in place. Having to tell the truth is already the law. But, legislating a new regime where all financial services are fiduciary would be impossible to put into practice.

In contrast, a fiduciary duty can and should be expected by the consumer and should be required of the provider if the service is understood to be advice. Sometimes, financial services providers permit the distinction between advice and other services to be confused, perhaps deliberately.

Having the entire relationship take on the mantle of fiduciary prestige can attract very profitable customers. This confusion is where the problem lies and is what the SEC can effectively address. However, it should not, as some of my RIA colleagues may hope, force brokers and sales organizations out of the advisory business altogether.

Instead, I believe the better solution would be to require firms and individuals to affirmatively declare, with clear acknowledgement by the consumer, when they are acting not in a fiduciary role. Absent that, their activities would default to a presumption of fiduciary conduct. When appropriate, consumers would then be put on notice to be wary.

For some firms, then, separate personnel, separate compensation systems, even separate facilities may need to be put in place to avoid any misunderstanding about whether a fiduciary duty applies or not. For firms like ours, there should never be any confusion. We always act as fiduciaries to our clients.