Legislative Update: Enjoy the Bush Tax Cuts While They Last

As we head into 2010, there seems to be very little good news on the horizon for wealthy taxpayers. Due to the temporary nature of the tax cuts passed during the Bush Administration and new initiatives being pushed forward by the Obama Administration, Congress is likely to enact legislation this year on personal income taxes, health care reform, and the estate tax, all of which may have an impact on most of our clients’ pocketbooks. Below we summarize the current consensus on income tax rates that will likely prevail starting in 2011, mention a few tax planning strategies worthy of consideration for many of our clients, and comment on the direction of possible surcharges Congress is considering to help pay for health care reform. Later in this Insight, Clay Stevens discusses the outlook for estate tax reform, which many observers believe will be made retroactive to January 1, 2010.

Income Taxes

The chart below summarizes marginal income tax rates for 2010, accompanied by two scenarios for 2011: the rate structure proposed by President Obama; the rate structure that will be resurrected if Congress fails to act, the Bush tax cuts expire, and tax law reverts to 2000 rates.

As you can see, under both scenarios, taxpayers in the top two brackets are facing a future with higher rates on ordinary income, long-term capital gains, and qualified dividends. In fact, other than the treatment of qualified dividends (Obama’s proposal would continue to tax them at favorable long-term capital gains rates as opposed to ordinary income rates), for wealthy taxpayers, the two scenarios are currently identical for taxpayers in the top brackets. As we write this update, it appears that this consensus view is very likely to become law. That said, the need to reform the AMT, address the deficit, and the normal machinations that occur as a large tax bill works its way through Congress could result in further changes that are hard to predict.

With the direction of tax rates for the “wealthy” pretty clear—they’re going up—this year’s debate in Congress will likely focus on tax rates for the “middle class.” President Obama campaigned on a promise not to raise taxes for families earning less than $250K and individuals earning less than $200K. But that promise was made in 2008, and could prove very hard to keep in an environment characterized by a recovering, but still weak economy, budget deficits moving quickly toward record levels, and funding for health care reform still not completely resolved.

Moreover, legislative inaction also has consequences: the chart highlights that if Congress fails to act this year, even taxpayers in the lower income tax brackets will see significant tax increases in 2011 when the Bush tax cuts expire. President Obama and the Democratic majority in Congress thus face competing priorities of keeping campaign promises and demonstrating fiscal responsibility, with mid-term Congressional elections ahead this fall. Stay tuned, it’s going to be a very interesting year...

Implications of Higher Income Tax Rates

In 2010, the final year of the Bush tax cuts, some interesting planning opportunities arise for wealthy taxpayers. Over the course of the upcoming year, your Aspiriant client service team will work with you to determine if any of the following strategies make sense for you, given your specific facts and circumstances.

  • Accelerate income into 2010, and defer deductions into 2011.


  • Diversify concentrated positions in 2010.

  • Reposition equity investments to take advantage of tax-managed strategies.

  • Reposition fixed income investments towards municipal bonds

Health Care Reform

Congress appears poised to pass sweeping health care reform legislation early in 2010. As Congress begins its work reconciling the House and Senate versions, it’s not yet clear what the impact that legislation will have on individual income and other tax rates.

Our comments here are focused on the major revenue raising provisions directly impacting individuals, as passed by the House and/or Senate in their respective bills.

  • The House bill specifically imposes a surcharge of 5.4% on income above $500K for singles and $1M for couples, beginning January 1, 2011.

  • The Senate bill contains no such provision, but does impose a higher Medicare tax rate from 1.45% to 1.95% on wages over $200K for individuals and $250K for couples beginning in 2013.

  • In addition, the Senate bill includes a 40% excise tax on so-called “Cadillac” health plans, defined as employer sponsored group plans with premiums equal to or greater than $8,500 for individuals and $23,000 for families, to commence in 2013.

  • Both House and Senate bills limit pre-tax contributions to flexible spending accounts to $2,500.

  • The Senate bill increases the AGI threshold for claiming the itemized deduction for medical expenses from 7.5% to 10%.

None of these provisions are law yet, and modifications will surely occur during the reconciliation process, but some version of the above items will likely be heading to President Obama’s desk soon.

Karen Blodgett
and Tom Tracy

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