The Taxes Are Coming…Back!
Jerry Lynch CFP® CLU ChFC

Paul Revere is most remembered today as the nighttime messenger who, just before the battle of Lexington, warned of the British troop movement. He rode at midnight on April 18 (morning of April 19) 1775, from Boston to Lexington, to warn John Hancock and Samuel Adams about the British Army’s movement.  Historians say that Revere could not actually shout the famous phrase attributed to him, “The British are coming! The British are coming!” because the mission depended on secrecy and the countryside was filled with British subjects. The Massachusetts Historical Society, in accounting for Paul Revere’s famous ride, claims that he actually shouted, “The regulars are coming,” and this was understood as a warning that the British were moving.

As the year 2010 is starting to wind down, a battle cry that could be made famous for this year would be “The taxes are coming! The taxes are coming!” However, a more accurate saying could be, “The taxes are coming back!” Many temporary tax cuts that were enacted in 2001 and 2003 are scheduled to expire on December 31, 2010. Starting on January 1, 2011, unless Congress decides to extend certain tax cuts or make new changes, there will be increases in some income tax, capital gains, and estate tax rates and rules.

With all of the uncertainty surrounding this situation, this may be a good time to review your investment portfolio to see if your current plan will hold up in the future. Starting in 2011 tax rates that were in effect prior to 2001 are scheduled to return. Specifically, the top income tax rate will go back to 39.6% and the special low 10% bracket will be eliminated. There have been discussions this year over making some potential changes or extensions of the current conditions. However, as of the date of this article, nothing has been passed.

Also, the tax rate reductions for long-term capital gains and dividends are scheduled to expire in 2010. Specifically, in 2011, the maximum long-term capital gains tax rate will go back to 20% from its current 15%.

Another adjustment to think about is the taxation of dividend income. Starting in 2011, dividend income (other than capital gains distributions from mutual funds) will change from being taxed at 15% to being taxed at ordinary income tax rates (once again dividend income will be taxed at your highest marginal tax rate). This means that in 2011 you could pay as high as 39.6% federal taxes on qualified dividends.

As if things weren’t bad enough, the estate tax will be revived. For those who die after 2010, the estate tax will return with a $1,000,000 exemption and a 50% maximum rate. Currently, there is no Federal estate tax for those who pass away during 2010.

Some other smaller changes for 2011 include an adjustment in the child tax credit. Specifically, the credit of $1,000 per eligible child will be reduced to $500 after 2011. Also, after December 31, 2010, none of the child tax credit will be refundable to taxpayers if their earned income is more than $12,550.

These are just some of the changes that 2011 will bring to taxpayers. Once again, our question is: has someone taken a look at your personal situation to make sure that you are prepared for these changes? January 1, 2011 could prove to be a day of reckoning for many taxpayers.

If you look ahead to the year 2013, the potential tax environment could get even more confusing. As part of the new Health Care Bill that was passed by Congress earlier this year, a new 3.8% Medicare surtax is scheduled to be assessed starting January 1, 2013. This new surtax will be on or the lesser of “net investment income” or the excess of “modified adjusted gross income (MAGI)” over the threshold amount. For purposes of this calculation, currently “net investment income” is defined as the sum of gross investment income over allocable investment expenses. This “investment income” (for the purpose of this 3.8% surtax) includes: interest, dividends, capital gains, annuity income, rents, royalties and passive activity income. Currently it does not include distributions from IRAs or qualified plans.

This surtax can take the top tax bracket of the 39.6% up to 43.4%. It can also take the top capital gains tax of 20% to 23.8%.

Earlier this year President Obama’s office presented a new proposal for 2011 tax rates that differs from both the current and scheduled rates. According to an ABC News February 2010 press release following this topic, when discussing the President’s tax bracket plan, a Senior Administration official told reporters that “the sounds you hear are the sounds of hard choices being made.”

That same logic should apply to taxpayers. Now is the time to review your personal tax situation to prepare for these changes.

While the tax situation may take some time to settle, we still should plan on reviewing and preparing for the upcoming changes.

Some good questions to ask yourself now are:

• How will the change in tax rates affect my current investments?
• How will the change in tax rates affect my taxable income?
• Are there things I can do to prepare for these pending changes?
• Is my estate best positioned for the return of the estate tax?

This is a time when a tax return, estate plan, and investment portfolio review by a qualified financial advisor can prove to be helpful.

For those readers who are not currently clients of ours, we invite you to schedule a complimentary appointment with our office to see if we could potentially add some value to your situation. Please call Pam Karkenny in our office at (973) 439-1990 to schedule your appointment today.

For both clients and friends of our practice, as we stated in the beginning of this article,
“The taxes are coming…back!” We look forward to keeping you updated as this process continues.

About Jerry Lynch:

Jerry Lynch is President of JFL Consulting and has over 23 years in insurance and financial planning.  He has been a regular guest on CNBC, WABC and does regular articles for the Star Ledger.

If you’d like a copy of this article sent to someone else who would benefit from this information, please contact Pam at (973) 439-1190.

This article is for informational purposes only.  This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a financial professional.

Jerry Lynch is a Financial Planner with JFL Consulting, Inc., and also offers Securities as a

Registered Representative of Comprehensive Asset Management & Servicing Inc. – Member of FINRA/SIPC