As you race to get your 2009 federal income tax return in the mail, take a moment to consider the tax landscape. It's changing, especially for senior citizens, and it's not too early to start planning for it.
No matter how you slice it, taxes are probably headed higher, if not this year then next year for certain. The income tax reductions enacted in 2001, often referred to as the "Bush tax cuts," are set to expire at the end of this year. It's possible Congress could vote to extend them for a year or two, but unless the economy slides back into a recession, few analysts expect that.
That means starting next January chances are you will move into a higher tax bracket, even if you're not making any more money. In most cases, you can expect more money to be withheld from each paycheck.
Currently, the top tax brackets are 35 percent and 33 percent. These are the rates paid on income by the wealthiest Americans. When the tax cuts expire, the top tax rate will rise to 39.6 percent.
There are bigger changes farther down the tax table. The tax cut law added two extra tax brackets; a 25 percent bracket and a 10 percent bracket. When the law expires, the 25 percent bracket reverts to 28 percent while the 10 percent bracket moves up to 15 percent - the largest increase of all.
Also set to expire are some reductions in taxes on investment income.
Deduction limits?
In addition, President Obama has floated the idea of limiting some deductions claimed by upper income tax payers. For example, the administration has suggested limiting the value of top earners' itemized deductions to 28 percent.
Even though they would be paying 39.6 cents of every taxable dollar in taxes, deductions would only save 28 percent of every taxable dollar. At the same time the Administration has also suggested limiting the value of the current mortgage interest deduction.
Should you be worried about that? Probably not, at least not right away. Those changes would require action by Congress, which is unlikely in an election year, if at all. Also, the impact falls only on those in the top tax bracket.
Are there any taxes you should plan for in the short term? Yes, if you're a high wage earner. The just-passed health-care bill contained a couple of increases in Medicare payroll taxes for higher-income taxpayers. Analysts at Deloitte say those provisions would cost about $2,250 for a family with income of $500,000.
For retirees, the Medicare Part B premium, which is deducted from Social Security checks, has gone up. The cost this year is $2,652 for a married couple, up almost 17 percent from the $2,270 cost last year. Those in the upper income brackets will pay even more.
If you retired this year, don't forget you'll be taxed on 85 percent of your Social Security benefits. You will likely need to make quarterly estimated payments to avoid owing additional taxes, and possibly penalties, at the end of the year.
Roth conversions
One of the biggest tax changes of 2010 is the ability of all income groups to have a Roth Individual Retirement Account. In the past, upper income groups could not participate.
The difference in a Roth and traditional IRA is simple. In a traditional IRA, contributions are tax deductible each year, the money grows without a yearly tax event, and the account holder then pays taxes as she withdrawals the money.
With a Roth account, the contributions are not tax deductible but withdrawals are. This is a significant advantage if you expect to remain in a high tax bracket during much of your retirement years. However, to convert a traditional IRA to a Roth, the account holder must pay taxes on the current value of the account, which can be a significant hit.
The Estate Tax was repealed for 2010, meaning there is no tax this year on any sized estate. However, the tax is scheduled to return next year, taxing any estate over $1 million in value. The tax rate would also go up significantly. Congress is expected to take action before that happens and may set the limit a bit higher.
In 2007, federal, state and local taxes claimed about $3.8 trillion, or 27 percent of U.S. gross domestic product, according to the non-partisan Tax Policy Center. That's nearly $13,000 for every American. Two-thirds of tax revenues went to the federal government.
It may sound like a lot, but taxpayers in other developed countries pay even more. In 2006, taxes in 30 of the world's richest countries averaged 36 percent of GDP; only Mexico, Turkey, South Korea and Japan had tax rates lower than the US. And taxes in many European countries exceeded 40 percent of GDP because these nations offer more extensive government services than the US does.
Americans do pay far more in individual income taxes than residents of other wealthy nations. Nearly 37 percent of U.S. tax revenue came from personal income taxes in 2006, about 10 percentage points more, on average, than in other industrialized countries. But Americans pay much less in sales taxes; 17 percent of 2006 U.S. tax receipts were from taxes on goods and services, or about half the 32 percent average for rich countries.
For more information contact Senior Solutions at (954) 456-8984 or toll free at 1-800-213-3524
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