Income Tax Rate 2011

[chinaco]

The Bush income tax and cap gain tax reduction expires in 2011.



2010 seems to be a special year for the cap gains tax rate.

How are you taking advantage of 2010?

How are you planning or preparing your assets for future income taxes (higher rates)?

 

[Gone4Good]

I'm not doing anything. I already gamed the capital gains tax system in 2008/2009 by selling investments with a high tax basis (like Vanguard's International Explorer fund that typically paid out nearly 100% of gains in annual distributions) and swapped it for near equivalents (like Vanguard's international small cap index). As a result, I have plenty of tax losses to apply against future taxable gains.

Oh, and I quit my job. So 2010 is my last year in a high tax bracket. Ha-ha!

 

[teejayevans]

There is also currently no death tax, so if you really don't want to pay taxes....
TJ

 

[chinaco]

There is also currently no death tax, so if you really don't want to pay taxes....
TJ

Think I will take a pass on that one.

 

[FIRE'd@51]

Since I have no tax-loss carryovers, I am writing calls against some of my long-term positions that have big capital gains. If the stock gets called away, I will pay the capital gains tax at 2010 rates (also the call premium gets added to the sales price so it also gets treated as a long-term gain). If I still want to own the stock, I will repurchase it with a stepped-up basis, most likely by selling puts.

 

[usafLT]

I'm not doing anything. I already gamed the capital gains tax system in 2008/2009 by selling investments with a high tax basis (like Vanguard's International Explorer fund that typically paid out nearly 100% of gains in annual distributions) and swapped it for near equivalents (like Vanguard's international small cap index). As a result, I have plenty of tax losses to apply against future taxable gains.

Oh, and I quit my job. So 2010 is my last year in a high tax bracket. Ha-ha!

Doesn't this fall under the wash sale rule? The wash sale rule states you cannot claim capital losses if you sell and then buy the same stock (or fund) or any significantly similar stock or fund within 30 days. Instead the losses can only be claimed once you actually sell the new investment (they are carried over). If I'm wrong, correct me but you might want to check that out so the IRS doesn't come knocking on your door.

 

[yakers]

I don't have that much in taxable. My longest held stock is up for sale, market just missed its limit price today. After that I have one other stock I may want to sell. Held stocks so long I don't have much tax loss harvesting carry over available, $13.00 I think. Maybe thats a good thing.

 

[samclem]

How are you taking advantage of 2010?

I'll be contributing enough to our solo 401K to drive our taxable income pretty far down below the top of the 15% bracket, then we'll sell enough appreciated assets at the 0% cap gains rate to take us back up to the top of that bracket.

We'll also be buying things we need anyway to get various tax credits while the government is still spraying money everywhere. I bought a garage door today, and all my fellow taxpayers paid for 30% of it.

How are you planning or preparing your assets for future income taxes (higher rates)?

We're not doing much in this regard. We've got some $$ in Roth IRAs, which might help later, but I'm concerned enough about possible rule changes regarding Roth's that I don't want to shift more money that way. We've got some flexibility now, which is a good thing to have when turbulence is likely.

 

[kramer]

I am retired and live off interest, dividends, and capital gains. I have no pension or social security or IRA income.

> How are you taking advantage of 2010?
> How are you planning or preparing your assets for future
> income taxes (higher rates)?

I am doing the same thing this year as in the past 2 years. I purposely create enough capital gains (on top of the qualified dividends that I receive) to bring me up to the top of the 15% income tax bracket. And I pay $0 in federal income taxes.

So I am raising the basis in my taxable accounts during these three years. This also enabled me to properly diversify some positions that had gotten too high.

I make sure that my taxable account interest income plus the non-qualified dividends total less than my standard deduction (something like $8500 altogether). I think for a single person like me, who makes a $3000 contribution to an HSA, I could make about $46500 in 2009 and pay no taxes using this technique. I do as exact of a calculation as I can in late December, you can't always tell exactly what your distributions will be -- this year I came within about $1200 of that number, if memory serves.

The only negative is that you lose the deduction for foreign taxes paid on your mutual funds that hold foreign stocks since you can't get the deduction if you paid no taxes (I would need to pay in about 8% of my income in federal taxes to be able to deduct all of my foreign taxes paid). However, I did carry back my 2008 foreign taxes paid to 2007 (you can do a one year carryback) and am expecting a $1000 check for the IRS for that.

This will all change in 2011 and I will modify my strategy accordingly. But no one knows yet what the capital gains and qualified dividend tax rates will be since Congress has signaled they will likely not let them revert back to pre-Bush levels.

Kramer (who already paid 2 lifetimes of taxes while he was working)

 

[Gone4Good]

Doesn't this fall under the wash sale rule? The wash sale rule states you cannot claim capital losses if you sell and then buy the same stock (or fund) or any significantly similar stock or fund within 30 days. Instead the losses can only be claimed once you actually sell the new investment (they are carried over). If I'm wrong, correct me but you might want to check that out so the IRS doesn't come knocking on your door.

You're not wrong, necessarily. But unless you're buying exactly the same thing, the wash sale is going to be subject to interpretation. I feel pretty good with my argument that a small-cap index fund isn't the same thing as a small-cap actively manged fund.

 

[audreyh1]

The Bush income tax and cap gain tax reduction expires in 2011.



2010 seems to be a special year for the cap gains tax rate.

How are you taking advantage of 2010?

How are you planning or preparing your assets for future income taxes (higher rates)?

Several years ago I decided to realize gains on most of my long held stock by the end of 2010, and due the an early year run-up I've already met my goal. I had to be patient for the past two years, but finally things got back to peak prices.

I will pay AMT this year due to high cap gains income, but in future years I hope to avoid it. I should be able to.

After this year I expect to be able to manage our income to remain well under the $250K that may trigger higher future taxes.

Audrey

 

[FUEGO]

I won't really take any action other than prepare myself to pay about $3000 more in taxes next year due to the reinstatement of the marriage penalty and the reduction in the child tax credit. I know I have said this here probably 10 times, but I am surprised that the media has not made a huge deal out of this. $3000 is a lot of money to struggling middle class families. I guess the media will pick up on it oh say, in December when Congress proposes a pork laden temporary fix for 2011 to prevent the marriage penalty reinstatement and keep the child tax credits the way they have been in recent history.

 

[clifp]

I wonder if anybody has thoughts/insights about will happen to tax rate for dividends in 2011.

Currently, Cap gains will go up to 20% in 2011, but dividends will be treated as ordinary income and probably could go up to 39.6% (Not that my tax rate will be the high ).

My portfolio is heavily dividend focus and so the change would have a potentially significant impact on my taxes. Any other dividend investor considering changing their focus?

 

[Gone4Good]

I wonder if anybody has thoughts/insights about will happen to tax rate for dividends in 2011.

If I recall correctly the Administration's preference is to keep the dividend and gains rate the same.

However, it seems like a lot of sausage making has to take place with respect to the tax code within the context of unprecedented budget deficits. Whatever politicians think they might want today, could be revised in favor of higher taxes once the process is finished.

 

[audreyh1]

I wonder if anybody has thoughts/insights about will happen to tax rate for dividends in 2011.

Currently, Cap gains will go up to 20% in 2011, but dividends will be treated as ordinary income and probably could go up to 39.6% (Not that my tax rate will be the high ).

My portfolio is heavily dividend focus and so the change would have a potentially significant impact on my taxes. Any other dividend investor considering changing their focus?

I thought the dividends were going to go back to the way they were - i.e. no longer "qualified" and taxed as ordinary income. That still might only be 15% for some folks....

I guess the only things I've heard is to "keep the Bush middle class tax cuts" but cap gains, dividends, and higher tax brackets would to back to the way there were before the Bush Tax Cuts.

Audrey

 

[Sesq]

I converted $80K of my IRAs to Roth (had basis of $6K). I will not be accepting the offer to defer that income into 2011 and 2012 and instead will report it all in 2010. This is specifically to take advantage of the Bush tax rates. I am paying an effective rate of 31% on this conversion, but I view that as a supersized IRA contribution. Since PA doesn't tax conversions I am able to do it at the fed rates only. I expect my fed rate will drop in retirement, but I most likely won't be in PA, and thus will owe state taxes on any withdrawals from traditional IRAs, so my fed and state rate will most likely still be in the 30% range, even with the eventual VAT (they won't repeal the income tax in my opinion).

 

[smjsl]

I thought the dividends were going to go back to the way they were - i.e. no longer "qualified" and taxed as ordinary income. That still might only be 15% for some folks....

I guess the only things I've heard is to "keep the Bush middle class tax cuts" but cap gains, dividends, and higher tax brackets would to back to the way there were before the Bush Tax Cuts.

Audrey

Would this affect folks with incomes below 200k/250k AGIs? I thought taxes were not supposed to go up below these limits? (not meant as a political comment at all - just wondering if they would not repeal the cuts for higher incomes only)

 

[ziggy29]

Would this affect folks with incomes below 200k/250k AGIs? I thought taxes were not supposed to go up below these limits? (not meant as a political comment at all - just wondering if they would not repeal the cuts for higher incomes only)

This, as I understand it, has been more or less the stated position of the majority party, yes. They've been on record as saying they want to extend the tax cuts below those income thresholds. But until anything is actually passed and signed, I wouldn't assume it.

 

[kramer]

Supposedly, there is a consensus for keeping the concept of qualified dividends in 2011 and beyond, and matching the tax rate of these dividends with the cap gains rate. In fact, I think the excise tax on dividends for higher earners in the health care bill actually increases the chances of this happening.

But I really think things are up in the air at this point.

Kramer

 

[HsiaoChu]

I should have paid about $3000 in capital gains at the 15% rate, but with all the special credits(like the YOU WORKED credit), the feds actually owed me $455. Go figure!

 

[meierlde]

Based upon the Senate Budget committee plan the rate on dividends and cap gains will only increase if your total income is over 200/250k.

 

[clifp]

As I feared the intentions of keeping the dividend rate the same as capital gains, and the budget are conflicting.

From todays WSJ

The important quote.

Washington's perverse revenue estimation rules also increase the policy bias toward higher rates. The dividend increase to 39.6% (from 15%) is built into current law as the Bush tax rates expire, and so the current budget baseline assumes that revenue increase of roughly $200 billion. This means that any rate increase lower than 39.6% "costs" the government money under budget rules, and thus Democrats must come up with some offsetting tax increases or spending cuts to make up for the lost revenue. So under this Beltway math, even a dividend tax rate increase to 20%, or 28%, counts as a revenue loser.
All of this increases the likelihood that the Senate budget resolution dividend tax rate of 39.6% will become law next year. The millions of Americans who receive dividend income—most of them not rich— need to begin adjusting their investment strategy accordingly. And don't forget those Obama campaign promises from 2008.
]

 

[RonBoyd]

the feds actually owed me $455.

Your taxes for the year was a negative amount? Cool.

 

[kaneohe]

As I feared the intentions of keeping the dividend rate the same as capital gains, and the budget are conflicting.

From todays WSJ

The important quote.

I didn't read the wsj article (didn't want to register) so I couldn't tell if this quote was confusing or misleading. I have the feeling from clifp's opening statement and the following quote from an accompanying wsj? article that it is misleading since it omits (I think) the use of the word "maximum" when accompanying "dividend rate". ...... so dividends will simply be taxed as ordinary income at your (whatever it is) tax rate, not necessarily at 39.6%.
Perhaps the original wsj article did include that word so the quote above is just out of context.

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If Congress doesn't act, this reclassification will lapse at the end of 2010, and next year the top dividend rate would automatically revert to 39.6%
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