Some of the many TRA income tax changes include the following:
Income Tax Rates:
EGTRRA 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent income tax brackets will be extended for two years. These favorable tax rates will, again, sunset after 2012 and pre-EGTRRA rates will return: 28 percent, 31 percent, 36 percent, and 39.6 percent. High net worth taxpayers, that establish grantor trusts, will be in a position to take maximum advantage of the tax burn these trusts will create when the sunset ends.
EGTRRA low dividend rates will post TRA stick around for two more years. In anticipation of the increase in the rate of taxation of dividends to the ordinary income rates, wealth managers were contemplating juggling existing asset location (not allocation) decisions, so that the holding of dividend paying stocks would shift to more tax efficient buckets like retirement plans instead of being held primarily in taxable accounts. What this change might also mean is that the tax cost for Grantor Retained Annuity Trusts (“GRATs”) holding dividend paying stocks will be lower as clients can now take advantage of both the GRAT technique and the lower dividend tax rates.
Capital Gains Rates:
EGTRRA low capital gains tax rates of zero percent for taxpayers in the 10 percent and 15 percent tax brackets, and 15 percent for others will continue through the end of 2012. Again, advisers anticipating higher capital gains rates, had encouraged clients looking to diversify concentrated positions, to sell in 2010, before rates increased. Obviously, those strategies are not necessary given the TRA extensions. Similarly, a planned use of a charitable remainder trust (“CRT”) to soften the income tax blow on a diversification of a concentrated position, if rates rose as anticipated, will receive less attention. The good news for tax advisers, especially those that penned client newsletters or articles on this type of planning, is that the newsletters and articles should be saved and recycled at the end of 2012, when we’ll all face the same shenanigans as at the end of 2011. Remember, the TRA just deferred the issue, by extending the EGTRRA sunset two years.
The repeal of the itemized deduction phase out and the personal exemption phase out will sunset in 2013. That might help taxpayers qualify to deduct more of the professional fees they’ll incur figuring out all of the TRA implications for their planning. Clients should still be cautioned that other restrictions, such as the 7.5% (increasing to 10%) medical expense threshold, and 2% floor on miscellaneous itemized deductions, must still be contended with.
TRA enacted an Alternative Minimum Tax (AMT) patch for 2010 and 2011. Gee, what will 2012 bring? For 2011, the amounts would be $48,450 for single taxpayers, and $74,450 for married taxpayers filing jointly. The TRA extended the ability to use nonrefundable personal credits through 2012, to offset AMT. Code Section 26(a). Clients who reside in high income tax states, who bear high state income taxes and costly real property taxes, will still likely be awarded the booby prize of being subject to the AMT.
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