How we think tax rates will flush out for 2011

There has been much debate over 2011 tax rates.  Still, as of today, there is considerable uncertainty regarding what the tax law and rates will look like next year. In our opinion, there are three possible outcomes.  Click here to see an overview of rates under each scenario.

In order to predict what rates will be next year, we need a better understanding of how the law is constructed today.  Currently we operate under the EGTRRA provisions or more commonly known as the “Bush Tax Cuts”. These provisions are set to expire on sunset at the end of this year.  This means that unless Congress acts tax rates will revert to the higher pre-EGTRRA rates.

Under the first scenario, Congress will take action before the end of the year and extend the EGTRRA provisions into 2011. We think this makes for great campaign promises, but has little to no chance of being passed this year.  Consequently, we would not plan for reduced rates in 2011.

The more realistic outcome is that Congress does nothing.  Under this second scenario, tax rates would increase.  We think this is most likely outcome for rates before the end of 2010. Additionally, we think that Congress will pass before the end of 2010, certain extender bills.  These are selective changes to the tax code (i.e. adjustments to the alternative minimum tax threshold), but would not impact the overall tax rates.

Finally, there is a Presidential proposal (you can find it outlined by the Joint Committee of Taxation under JCS-2-10).  Under this third scenario, the upper level tax rates would revert to the pre-EGTRRA levels (generally for married couples with combined taxable income over $139,350).  The lower level tax rates however would remain at the “Bush Tax Cut” levels. We think that this proposal will get a lot of traction in Congress.  However, we do not anticipate any Bill to pass in 2010. However, we think some version of this proposal has a strong likelihood of passing in the first quarter of 2011.

This should give you a clear direction for how to plan for the remainder of 2010 and into 2011. If you have any questions regarding our future tax forecasts, please do not hesitate to contact us.

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