CCH Tax Brieﬁng
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vidual marginal income tax rates are 10, 15,25, 28, 33, and 35 percent.Under the sunset provision o EGRRA,amendments made by the Act will not ap-ply to tax years beginning ater December31, 2010. Consequently, the individualmarginal tax rates will revert to 15, 28, 31,36, and 39.6 percent eective or tax yearsbeginning ater December 31, 2010.
10 Percent Rate.
EGRRA created a newbracket, the 10 percent tax rate, or a por-tion o individual income previously taxedat 15 percent. Ater December 31, 2010, the10 percent rate will disappear and the frstportion o taxable income or all taxpayersthereore will again be taxed at 15 percent.
EGRRA made across the board rate reductions but its greatest beneft was to taxpayers in the top twoincome brackets. Ater 2010, higher-income taxpayers not only are scheduled to be subject to higher marginal income tax rates, they also, eective or tax years ater December 31, 2012, will be subject to an additional 0.9 percent Medicare tax on earned income above $200,000 ($250,000 or married couples fling a joint return) and a 3.8 percent Medi-care tax on the lesser o the individual’s net investment income or the tax year or modifed AGI in excess o $200,000 ($250,000 or married couples fling a joint return).
Individuals expecting to be subject to a higher income tax rate ater 2010 should explore the timing o income or deductible expenses. Deerring deduc-tions into 2011 may help to oset income that would be subject to a higher rate o taxation. Accelerating income into 2010 likewise might lower overall tax liability. Acceleration techniques include billing earlier, selling appreciated property, avoid-ing installment sales that deer gain, and accelerating bonuses. Converting to a RothIRA in 2010 also gives the taxpayer the option o recognizing the conversion in-come in 2010 or pro-rata over 2011 and 2012 under existing rules.
axpayers doing business as anS corp may be motivated to convert to aC corp in response to the rate increases,since the highest corporate tax rate re-mains at 35 percent. However, taxpay-ers should keep in mind the expected in-crease in dividend tax rates ater 2010. Additionally, ater an S corp converts toa C corp, it generally cannot switch back to being an S corp or the next fve years.
President Obama has pro- posed to make permanent the 10, 15, 25, and 28 percent rates or tax years beginning ater December 31, 2010 but allow the 33 and 35 percent rates to sunset as scheduled. Te president has also proposed to widen the tax bracket or the 28 percent rate so that individu-als with less than $195,550 o taxable income in 2011 ($200,000 o AGI, as-suming one personal exemption and the basic standard deduction, indexed or ination rom 2009), would not be sub- ject to the 36 percent rate. For married couples fling a joint return, the dollar threshold or the 36 percent rate would be set at approximately $237,300.
Although the tax rates are scheduled to revert to the levels in place in 2001 prior to EGRRA, the bracket amounts to which each rate is applied will continue to reect annual inationadjustments. Unlike some other EG-RRA sunset dollar amounts, those in- ation adjustments are required under the pre-EGRRA, EGRRA and post-EGRRA versions o the ax Code.
By ar the costliest provision toextend is the reduced individual taxes. According to the Congressional Budget O ce (CBO), they account or over 50 percent o the total revenue loss.
Itemized Deduction Phaseout for Higher-Income Taxpayers
he limitation on itemized deductions(called the “Pease” limitation ater thename o the member o Congress whosponsored the legislation enacting thelimitation) reduces the total amount o a higher-income taxpayer’s otherwise al-lowable itemized deductions. However,certain items, such as medical expenses,investment interest, and casualty, thetor wagering losses, are excluded.Under EGRRA, the limitation on item-ized deductions was gradually repealedstarting in 2006. For 2010, the limitationon itemized deductions is entirely repealed.Te limitation threshold amount, $100,000or most taxpayers and $50,000 or marriedtaxpayers fling separate returns, was set in1991, adjusted annually or ination.Under the sunset provision o EGRRA,the limitation on itemized deductions willbe reinstated in ull or tax years beginningater December 31, 2010.
Higher-income taxpayers whoanticipate being subject to the limita-tion on itemized deductions ater 2010 may want to explore the value o shit-ing some o their itemized deductions to 2010 by accelerating payment o de-ductible expenses beore year-end. Inaccelerating deductions to avoid the itemized deduction limitation, howev-er, those anticipating being in a higher rate bracket in 2011 should weigh care- ully the benefts o getting a reduced deduction that osets income taxed at a higher rate in 2011 against a ull de-duction that osets income taxed at alower rate in 2010.
President Obama has pro- posed to modiy the limitation on item-