Everyone is asking the same question these days, “Are taxes going up in 2011?”  I don’t think any of you would admit to enjoying your current low tax rates.  But the reality is, after this year, we’ll all be wishing we could go back to the good ol’ days of 2010.  There will be several changes to our tax rates as the Bush tax cuts of 2001 and 2003 expire.  Unless changes are made by Congress, we will be going back to the tax rates prior to 2001.

Currently the tax brackets are 10%, 15%, 25%, 28%, 33%, and 35%.  The new tax rates in 2011 will be 15%, 28%, 31%, 36%, and 39.6%.  So basically everyone will be paying more in taxes, no matter what your income will be.  We don’t know yet exactly where the income tax brackets will cut off, but if we use the 2010 rates and adjust for inflation, it will likely look like something this:

Capital gains taxes

Income tax rates are not the only thing that will be going up. Currently we pay 15% taxes on long term capital gains (held more than a year) or 0% if your income tax bracket is 15% or less.  Starting in 2011, the long term capital gains tax rate will be 20% instead of 15%, and those in the lowest tax bracket will pay 10%.

Stock dividends

Currently we are paying a 15% tax rates on qualified stock dividends.  Starting in 2011, stock dividends will be taxed at whatever your income tax rate is.  This will be a drastically higher rate for many people who rely on stock dividends for income.

Itemized Deductions 

Obama is pushing to put a cap on itemized deductions.  He ran into some opposition from charitable organizations earlier in the year on this matter, but he’s not giving up just yet.  It’s pretty likely that  this will somehow be overhauled, which will result in you getting fewer deductions and paying more in taxes.

What should you do?

There are a number of things you can do this year to help reduce your tax bill in 2011.  For starters, if you have the ability to take additional income in 2010 that you would normally take in 2011, you should do so.  This could be in the form of a bonus or deferred compensation.  Or, if you own your own business, you could pay yourself extra at the end of 2010 to cover some of your expenses in 2011.  This way you will pay much less in taxes on that income.

Second, if you are thinking about selling any stock, mutual fund, or bond positions, you should do it before the end of the year.  This will allow you to pay capital gains taxes at rates that are at least 33% less than they will be next year.

Third, if you would normally make a charitable donation at the end of 2010, and you can wait until January 1, 2011, it may benefit you to do so. 

And last, this would be the ideal year to consider making some tax efficient shifts to your investment portfolio.  This could include doing a Roth conversion of part of your IRA (at much lower tax rates this year), and/or shifting more of your money to tax deferred vehicles like annuities.

Talk to your personal financial planning advisor about things that you can do to prepare for these higher tax rates.  Doing so will help you pay less to Uncle Sam and put more in your pocket.  Of course you can call us for a free consultation about how to reduce your income tax exposure at 1-866-983-4222.