Reuters Money

How to plan for higher taxes

September 14, 2010
Now that Congress is back from the summer recess, hopes for a compromise on the much-politicized topic of taxes are fading fast. For those who need a refresher: Tax breaks put into place by President George Bush in 2001 and 2003 are scheduled to expire in 2011. President Barack Obama wants to raises taxes for wealthier Americans while freezing rates for families making $250,000 or less a year to bolster the economy. Republicans say wealthier Americans are drivers of economic growth and that tax cuts for them help the whole country. If the current tax law “sunsets” and disappears forever, Americans are certain to face higher income and estate taxes. They’ll pay higher taxes from the sale of investments like stocks and mutual funds. Dividend income will be taxed at a higher rate, too. If you are married, the marriage penalty will be more substantial. Here’s a detailed look at what expected tax changes could mean for your finances: New and higher tax brackets Tax brackets are expected to change dramatically, but, contrary to popular sentiment, rates will automatically go up for everyone who pays taxes — not just the individuals in the top federal income brackets, commonly referred to as “the rich.” Specifically: The existing 10 percent bracket will disappear, 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. The existing 35 percent bracket will be replaced by the new 39.6 percent bracket. It’s still hard to tell if these rates will go up across all income brackets. And separting the wealthy from the middle class is just as trick. One argument is that location and expenses can affect class status — a family earning $250,000 in a high-cost location like Manhattan, for example, may not consider themselves rich. There’s not much you can do if your income tax bracket changes, but there are some ways to control the bite of taxes. For example, if you are expecting a large bonus in 2011, it is worth asking for a payment this year. And if you are a freelancer, Higher dividends and capital gains Dividends and capital gains are currently taxed at 15 percent for high earners. Republicans want those rates to stay the same, but Obama wants to raise them to 20 percent for individuals making more than $200,000 and families earning above $250,000. (For assets held over five years, the capital gains rate would be 18 percent.) If Congress fails to act, the rate will jump to a whopping 39.6 percent highest earners. For tax-planning reasons, accountants and financial advisers are busy talking to clients about selling sell investments and even their homes before December 31 to lock in the 15 percent long-term capital gains tax rate. Werner Renberg, a Reuters contributor says, “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.” Estate and gift tax The passing of New York Yankees woner George Steinbrenner this year was one of the unusual stories that straddled both the sports and business pages. That’s because Steinbrenners heirs, skirted an estimated $450 million in taxes, thanks to the absence of the death tax this year, which disappeared for the first time since Teddy Roosevelt was president. “This is a golden era for shifting estates and giving assets away,” says Bill Fleming, a financial planner for PricewaterhouseCoopers in Hartford, Connecticut, tells Reuters. “If you have an estate plan, keep going: Uncle Sam soon will be back in your pocket.” Gift taxes, which dropped 10 percentage points to 35 percent in 2010, also are set to jump to 55 percent in 2011. Americans can give up to $13,000 per person a year, up to $1 million over their lifetime, without paying taxes. For more advice on planning for higher estate taxes, check out this Reuters column.,,id=98968,00.html Return of the Marriage Penalty The so-called marriage penalty can cause a married couple to pay more federal income tax than if they were single. It still exists, but thanks to the Bush-era tax cuts, it is not as harsh. But the marriage penalty will get significant worse when the Bush tax cuts expire. Currently, the standard deduction for some married couples is as much as 200 percent of the amount for singles. Starting next year, the new lowest bracket of 15 percent for married filing joint 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, reports 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. It is unlikely that couples are going to put off getting married due the marriage penalty. (In fact, if they In addition to these changes, both the itemized deduction and personal exemption phase-out rules will return with a vengeance. The childcare credit is also expected to be slashed from $1000 to $500. But current versions of the earned income credit, dependent care credit, and adoption credit are also likely to be continued. For more smart advice on what to do if the tax cuts expire, check out this story.

Now that Congress is back from the summer recess, hopes for a compromise on the much-politicized topic of taxes are fading fast.

How to cut property tax with an appeal

September 8, 2010
This may sound crazy, but you need to lower your home’s value. I’m not suggesting you damage it in any way. Just challenge what your local assessor is saying it’s worth so that you might be able to lower your property taxes. I try and do this every year with some success. With property values still down across the board in most places, now is the best time to appeal your home’s value. We’re entering the season in which assessors release valuations of how much your home is worth for tax purposes. Their assessed valuation is one part of the basis for your property tax bill. The valuation times local tax rates (for schools, fire protection, etc.) equals your real-estate bill after exemptions and other local factors are applied. Most counties give you a limited window in which to appeal your valuation — typically about a month. After that, you’ll have to wait until next year to do an appeal. Don’t wait. You’ll need to do a lot of homework to win a successful appeal. Since only 30% of all homeowners appeal their assessment, you have a good chance of getting a hearing on how to lower your valuation. You will be appealing last’s year valuation — not this year’s — since property taxes apply only to the previous year. So what’s happening in your market now isn’t relevant to your assessor. Also don’t confuse an assessed valuation with a market value. They are not the same thing. A market value goes through a real estate appraisal process for purposes of selling a home. Your local assessor makes a much more basic calculation based on your neighborhood, type of home and improvements. Here’s what you need to know:  Is Your Property Record Correct? It’s public information as to how many bedrooms and bathrooms you and your neighbors have. Check your assessment record. If they have you incorrectly listed for an extra bath or finished basement, go right to the assessor to fix that. It could easily lower your tax bill.  Are comparable homes valued less than yours? Assessors are concerned about consistent valuations. Compare your home with similar houses of equal footage, improvements, lot size and other characteristics. If you file an appeal, you will need “comparable” home examples. Present recent professional appraisals.  Is your home new? You will need a sales contract to show what you paid. If it declined in value, then make a case with recent sales figures. Any factor that may have caused your home to drop in price should be presented. Most simple errors can be corrected with your assessor. If that doesn’t work, you can appeal on the county and state levels with real estate boards of appeals. Keep in mind that most appeals fail because homeowners don’t present the facts logically and succinctly. Most county appeals hearings only give you a few minutes to state your case. If you’re emotional and try to argue based on your gut feeling, you will lose. You can hire lawyers and appraisers to help in your appeal. If you take them on, make sure you pay them based on contingency or a flat fee. Lawyers will take one-third of your tax savings. Avoid those who bill on an hourly basis. If you win your appeal, you could save from a few hundred to a thousand dollars on your tax bill. To most homeowners, lower tax bills are much more alluring than granite counter tops. Your homework is worth the effort, won’t impact your market value and will make your home more appealing when you go to sell. Got any perplexing financial concerns? Let me know. John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (”

This may sound crazy, but you need to lower your home’s value.

Why you could end up in a tax bracket intended for the rich

September 7, 2010

Werner Renberg is a writer and author based in Chappaqua, N.Y. He is the author of four books, including All About Bond Funds: A Complete Guide for Today’s Investors. The opinions expressed are his own.

How to conquer the retirement worry gap

September 1, 2010
/Could you read another report that shows how little Americans have saved for retirement in these troubled times? I know it’s difficult, so I came up with a simple formula for figuring out how much you need. Pencil in how much money it would take for you to live comfortably for 25 years. Include items that are not covered by insurance – deductibles, travel, home maintenance, taxes. Then project how much Social Security and retirement income you will have by the age in which you cast that not-so-longing last glance at your office door. The difference between your comfort zone amount and your retirement kitty is the worry gap. That’s the amount you need to make up by working longer, saving aggressively or downsizing your lifestyle. For millions, the worry gap is a pretty deep crevasse. It’s hard to fill it up with money when your 401(k) is underfunded and the bills keep arriving. In a job-losing, no-raise economy, it looks like a bottomless pit. A recent survey – one that I always take note of – showed that some two-thirds of those polled in the two lowest pre-retirement income levels will be running short only 10 years into retirement. These folks, as monitored by the annual Employee Benefit Research Institute’s ( “Retirement Readiness” study, are saving the least for retirement. Yet even those in the highest-income groups are still going to be facing problems paying for basic expenses and uninsured medical bills. Remember that Medicare has co-pays for hospital and medical services and is in severe fiscal trouble. The EBRI study also broke down who was most at risk. “Early” boomers (those aged 56-62) had a 47 percent chance of running out of retirement funds. Their younger peers (ages 46-55) and “Generation Xers” (ages 36-45) are about 44 percent at risk. Where do you stand? If you are going to come up short, there are myriad ways of conquering the worry gap. Here are some options: • Downsize. Do you expect to live in the same space when you’re older? Can you live in half the square footage? A smaller home or apartment lowers your living costs. A move from a single-family home to a condo, co-op or townhouse can mean lower property taxes, maintenance and financing costs. This makes most sense for empty nesters. The key theme is that the American Dream shouldn’t be tied into the size of your shelter — it should revolve around what you can afford and how much you save. • Rethink Retirement. For many, completely retreating from the workforce completely is a bad idea. It may lead to poorer health, early death and annoying one’s spouse/partner full time. Being in the workforce longer means continued benefits and the ability to save. You may also get a free match in an employer savings plan. If you suffer from a disabling condition or chronic illness, this is not an option, so look at how you will cover medical expenses. • Automate Savings. If you’re in a 401(k), sign up for automatic enrollment and increases. If you don’t have to think about contributions, you’ll save more. Even if you don’t have an employer plan, you can set up auto-debits into Individual Retirement Accounts. • Fund Your Roth. Roth IRAs and 401(k)s are looking good right now. While your contributions are taxed, your withdrawals are not (subject to a few rules). Most retirement plan withdrawals are taxed at full marginal rates. I think income taxes are going up to cover Medicare’s shortfalls, so Roths rule. The best thing you can do is survey yourself, your family/spouse/partner and take a hard look at your comfort zone. You may have to throw out some preconceptions about retirement, but don’t ignore the possibility that some adjustments may be needed.

Could you read another report that shows how little Americans have saved for retirement in these troubled times? I know it’s difficult, so I came up with a simple formula for figuring out how much you need.

Dump the mortgage deduction to revive U.S. housing

August 25, 2010

Some sacred cows need to be sacrificed in order for a country to prosper again. Let’s start with the deduction for mortgage interest on U.S. tax forms.

Municipal bonds still attractive despite ugly state finances

August 18, 2010
Are municipal bonds the next domino to fall in the still-bruised U.S. financial landscape? While some municipalities and states are definitely fiscal basket cases – California and my home state of Illinois come to mind – “munis” still are generally a safe and yield-friendly way to invest. The most attractive quality of munis now is that defaults are rare, and yields are robust relative to U.S. Treasury bonds. The average tax-free rate for a municipal bond is 4.21 percent, according to the Leuthold Group. Since municipal income is not taxable, the biggest benefits flow to higher-income investors. For a taxpayer in the 35-percent bracket, that 4.21 percent translates to a 6.5 percent tax-equivalent yield. Considering that 10-year Treasuries are yielding less than 3 percent, munis are definitely appealing. Most short-term savings accounts are returning less than 1 percent. Still, there’s the growing problem of public fiscal meltdowns. There are huge pension liabilities looming, and states are cutting jobs left and right. The State of Illinois owes hundreds of millions to school districts and colleges. The economic tide is out in California in a big way. Despite the raft of bad news, bankruptcies of public agencies are rare. There has been an average of eight municipal bankruptcies per year from 1934 through 2009. The five-year default rate for investment grade municipal debt is 0.03 percent, compared to about 1 percent for corporate paper, Leuthold reports. The odds that a state, city or county will go bust is rare. After all, they can always hike taxes, cut jobs and services or restructure debt. From 1970 to 2009, only 54 issuers defaulted, mostly in the housing and health care sectors, according to Moody’s Investors Services. The best way to avoid problems is to protect yourself before you buy a bond or mutual fund. Individual bonds are rated by the major ratings agencies Moody’s, Standard & Poor’s and Fitch. Their letter system is fairly simple: triple-A is the top grade for S&P, Fitch and Moody’s. When you head down the ladder, it’s like looking at term paper grades. A-rated debt is still “high quality,” while B-rated bonds mark the bottom of the investment grades. Generally, the lower the grade, the higher the risk of default. You take the biggest risks by holding single bonds, so it makes sense to diversify through a larger portfolio or bond mutual fund or exchange-traded fund. Fund managers are constantly sorting through bonds and doing research to avoid problems. You can also buy funds that are tailored to the state you live in to avoid paying state income tax. Some relatively low-risk candidates include the Vanguard Limited-Term Tax-exempt fund (VMLTX) and the iShares S&P National Municipal Bond exchange-traded fund (MUB). Both feature low expenses and a wide selection of bonds from across the country. When buying a bond fund, low expense ratios will boost your total return. This is what managers charge on an annual basis for their services. The Vanguard fund, for example, has a 0.2 percent ratio, which is below average for similar funds. If you’re going to buy individual bonds, ask your broker/advisor to perform due diligence to carefully vet the financial condition of the issuer. If they don’t – and you get stuck with a bum bond – it can be a perilous situation.

Are municipal bonds the next domino to fall in the still-bruised U.S. financial landscape?

The political and pragmatic promise of municipal bonds

August 18, 2010
RickEmbracing a Pragmatic Approach to Municipal Bonds By Rick Ashburn 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. Muni 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 advisor. 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 9 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, California 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 sub-prime 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 BBB- 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” muni 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 muni bond credit spectrum are bonds of the genuine public purpose type. Bonds that 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. Again – schools, highways, water systems, etc. 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, California. 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. Rick Ashburn is the managing partner of Creekside Partners, based in Lafayette, California. He is a certified financial planner. He can be reached at:

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.

Municipal bond investing with mutual funds

August 9, 2010

statebudget0234States are slashing budgets by laying off teachers and closing libraries, but almost none of them have stopped paying interest on their debt. That’s good news for investors in municipal bonds, analysts say. Here is an article I wrote with my colleague Aaron Pressman about the current opportunities for municipal bond investors.

How to plan for a higher estate tax

August 4, 2010
John F. Wasik is a Reuters columnist, speaker and author of  The Audacity of Help ( and 12 other books. The opinions expressed are his own. The estate tax is in limbo this year, so if you are looking at a significant inheritance, death may pay some dividends. As a vestige of the 2001 tax act, the so-called “death” tax disappeared this year, although convoluted rules on valuing estate assets often resulted in higher income taxes. With other issues such as the global financial meltdown, a recession, health care and financial reform dogging it, Congress didn’t get around to fixing the estate levy. Don’t get any ideas. Death and taxes will still have a sting – eventually. Congress will likely do something about the tax before the end of the year – probably after the November election – so don’t count on a free ride. You’ll still need to do some cautionary estate planning. While no one knows what Congress will do, it’s a fairly sure bet the tax will return in some form next year. Record budget deficits mean Congress will be looking for revenue sources. Unless Washington acts, the tax will jump back to the old, pre-Bush-era 55% rate, with a $1 million exemption in 2011. That’s quite a hike considering that last year, when the tax was still in effect, you could get a $3.5 million break per person at a top rate of 45%. There’s little question that the estate tax and related rules are extremely complicated. An overhaul would require a comprehensive look at the myriad trusts and other vehicles used to reduce tax liability. One of the biggest unanswered questions is whether the new tax – and I predict one is coming – will be retroactive. If we’re still mired in a downturn, I don’t foresee any Draconian tax changes. Congress usually opts for “grandfathering” (extending) a tax break into the past rather than imposing a huge, new tax. In the interim, prepare for the coming estate-tax changes with some basic planning. Don’t wait for Congress to make up its mind. • Talk to an estate planning attorney and fee-only financial planner. Do you have a basic estate plan or living will that tells loved ones what to do if you’re seriously impaired? Do you have directions as to what to do with assets upon your demise? • A living trust may be a better vehicle if you have a sizable estate, but they are complicated and need to be planned carefully. Beware of “trust farms” that try to rush you into boilerplate vehicles. It took my wife and I one year to design our trust. • Have you looked at life insurance planning with your adviser? Remember, life insurance proceeds are still tax-free to beneficiaries, and it’s unlikely they will be taxed any time soon. • Did you want to set aside money for charities? Have you considered charitable remainder trusts for this purpose? Donations can be gifted in any number of ways to reduce future tax liability. • If you need to fund college savings vehicles, you can contribute to 529 plans to reduce the size of your estate. One proposal that passed the House would have made last year’s estate tax levels permanent, although it failed to pass the Senate. When it takes up the issue again, it’s possible that Congress will tier the tax depending on the size of the estate. For example, an estate valued at less than $5 million may be subject to a 45% tax with 5-percentage point tax increases for each $5 million in estate value capped at a maximum 55% rate. There’s also a pressing question as to what kinds of exemptions Congress will allow before the tax kicks in. One House proposal called for $2 million to pass from one spouse to another, meaning that $4 million per couple may be exempt. Whatever you do, don’t wait until the end of the year. Talk to your trusted advisers now. Like the false demise of a certain American writer, rumors of the death of the estate tax are greatly exaggerated.

John F. Wasik is a Reuters columnist and author of The Audacity of Help. The opinions expressed are his own.

What to expect if Bush tax cuts expire

July 29, 2010
What Will Happen If the Bush Tax Cuts Are Allowed to Expire? Date: July 27, 2010 Type of Clients: Individuals and businesses that are not run as C corporations. Situation: Clients may not understand what’s in store if the Bush tax cuts are allowed to expire as scheduled. Deadline: Expiration will occur at the end of this year, unless something changes. Tax Action Required: Read this release, and keep your stomach medications nearby. Background As you know, the so-called Bush tax cuts (from legislation enacted in 2001 and 2003) are scheduled to expire at the end of this year. But, your clients may not understand the full extent of what is in store for them if Congress simply sits back and allows the expirations to occur without making any changes. Here’s the little-known truth. Appendix 1contains a summary of 2010 versus 2011 rates and amounts if the Bush cuts expire as scheduled. Higher Income Tax Rates for All Some clients 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% bracket will go away, and the lowest “new” bracket will be 15%. The existing 25% bracket will be replaced by the “new” 28% bracket; the existing 28% bracket will be replaced by the “new” 31% bracket; the existing 33% bracket will be replaced by the “new” 36% bracket; and the existing 35% bracket will be replaced by the “new” 39.6% bracket. [See IRC Sec. 1(i) .] Appendix 1 shows income levels in each of these brackets for 2010 and 2011 assuming that there are no inflation adjustments between 2010 and 2011. Outlook: The Administration has pledged to keep the three lowest brackets (the 10%, 15%, and 25% brackets) in place. The 28% 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% and 39.6% rates. As we said, 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. To sum up, the only thing we know for sure is that tax rates will go up for everyone if Congress sits on its hands. Marriage Penalty Will Get Worse Right now, the 10% and 15% rate brackets for married joint-filing couples are 200% as wide as the 10% and 15% brackets for singles. Similarly, the standard deduction for joint-filing couples is 200% of the amount for singles. Right now, the 10% and 15% rate brackets for those who use married filing separate status are the same as the 10% and 15% brackets for singles. Similarly, the standard deduction for those who use married filing separate status is the same as the standard deduction for singles. The Bush tax cuts put this 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. [See IRC Secs. 1(f) and 63(c) .] However, unless Congress makes changes and the president goes along, the marriage penalty will automatically get worse when the Bush tax cuts expire. Starting next year, the new lowest bracket of 15% for Married Filing Joint (MFJ) couples will be only 167% as wide as the 15% bracket for singles—for Married Filing Separate (MFS) couples, it’ll be 83.5% as wide as the 15% bracket for singles. Similarly, the new standard deduction for joint-filers will be only 167% of the standard deduction for singles. For MFS status, it’ll be only 83.5% of the amount for singles. See Appendix 1 for 2010 versus 2011 amounts assuming no inflation adjustments for 2011. Outlook: 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. Itemized Deduction Phase-out Rule Will Return with a Vengeance Before the Bush tax cuts, a nasty phase-out rule could eliminate up to 80% of affected itemized deductions for higher-income individuals. The phase-out rule covered the big-ticket deductions for mortgage interest, state and local taxes, and charitable donations. Deductions for medical expenses, investment interest expense, casualty and theft losses, and gambling losses were not affected. Thanks to the Bush tax cuts, the phase-out rule was gradually eased and finally eliminated this year. Next year, however, it will automatically return with a vengeance, unless Congress takes action and the president goes along. If nothing changes, clients will lose $1 of affected deductions for every $3 of AGI in excess of the applicable AGI threshold (subject to the 80% disallowance limitation), starting next year. As shown in Appendix 1, the threshold for 2011 is estimated to be $171,100 (or $85,550 for those who use MFS status). (See IRC Sec. 68 .) Outlook: The Administration has said it wants the phase-out rule back, but at higher AGI thresholds of $250,000 for married joint-filing couples and $200,000 for other taxpayers. However, raising the AGI thresholds would require Congress to take action and the president to go along. Don’t bet the house on it. Personal Exemption Phase-out Rule Will Return with a Vengeance Before the Bush tax cuts, another nasty phase-out rule could eliminate some or all of a higher-income individual’s personal exemption deductions. Thanks to the Bush tax cuts, this phase-out rule was gradually eased and finally eliminated this year. Starting next year, it will automatically return with a vengeance, unless Congress takes action and the president goes along. [See IRC Sec. 151(d)(3) .] If nothing changes, clients need to be ready for yet another bite out of their wallets if their 2011 AGI exceeds the applicable threshold. As shown in Appendix 1, the phase-out thresholds for 2011 are estimated to be $256,700 for MFJ; $171,100 for singles; $213,900 for heads of households; and $128,350 for MFS. Outlook: The Administration has said it wants the phase-out rule back, but at different AGI thresholds: $250,000 for married joint-filing couples, $200,000 for unmarried individuals, and $125,000 for those who use married filing separate status. Since this is pretty close to what will happen without any making changes, it would not be surprising if Congress chooses to do nothing. 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%. (As you know, a 25% maximum rate applies to unrecaptured Section 1250 gains, and a 28% maximum rate applies to long-term gains from collectibles.) Starting next year, the maximum rate on garden-variety long-term capital gains will increase to 20% (or 18% on gains from assets held for over five years). Starting next year, dividends will once again be taxed at ordinary income rates. So, the maximum rate on dividends will balloon to a whopping 39.6%. Right now, a 0% federal rate applies to garden-variety long-term capital gains and qualified dividends collected by folks in lowest two rate brackets of 10% and 15%. Starting next year, folks in the “new” lowest bracket of 15% will have to pay 10% on long-term gains (or 8% on gains from assets held for over five years) and 15% on dividends (since dividends will be taxed at ordinary income rates). Again—these things will happen automatically, unless Congress takes action and the president goes along. [See IRC Sec. 1(h) .] Outlook: The Administration has repeatedly said the current 0% and 15% 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 this 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%), starting next year. We hope we are wrong. Some Bush Tax Cuts Are Likely to Be Continued Some elements of the Bush tax cuts have gained bipartisan support and become “extenders.” They will probably be continued, despite the scheduled demise of the Bush tax cuts. Examples include inflation-indexed AMT exemption amounts, the ability to use nonrefundable personal tax credits to offset individual AMT liabilities, the above-the-line deduction for qualified higher education tuition and fees, and the increased Section 179 deduction. We also think the current versions of the child tax credit, earned income credit, dependent care credit, and adoption credit are also likely to be continued, despite the scheduled demise of other elements of the Bush tax cuts. (The Bush tax cut legislation liberalized these credits, and later legislation liberalized them even more). Conclusions Despite what some people think, the Bush tax cuts don’t just help “the rich.” They help just about anyone who pays federal income taxes, including folks who only file returns to collect free money from the government thanks to refundable tax credits. The scheduled demise of the Bush tax cuts next year will hurt lots of people, unless Congress makes changes and the president jumps on board. We did not even get to the fate of the Bush estate tax cuts. That’s a whole separate story, and it’s even more up in the air than the fate of the Bush income tax cuts.

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.