The Rea Legislative Crystal Ball: What Taxes Await in 2011?

Christopher Axene | September 15th, 2010

Everyone wants to know what tax legislation Congress will approve in the coming months. In reality, Congress has little incentive to act on anything ahead of the November mid-term elections other than what to do with the expiring Bush tax cuts. At the risk of quickly being outdated, here are my predictions on some of the most commonly discussed tax legislation provisions.

Taxes on healthcare? Some have misinterpreted this part of the healthcare reform law to mean that the value of your health insurance will be included as “wages,” however this is not correct. It is true that employers will need to begin reporting the value of the insurance benefits they provide to employees on the 2011 W-2, but this is so the IRS can “tax” the insurance companies on any “Cadillac” health plans.  There is no impact on the employee through this disclosure (although I’m sure we’ll see it in higher premium rates going forward).

Action to retain Bush tax cuts. It is likely that Congress will do something in the four plus weeks they have to conduct business before they break again, which could include the capital gains tax and potentially the dividends tax (which is currently tied to the capital gains rate).  The dividing line right now is whether to extend the tax cuts (potentially for two years) for everyone but the rich, or to extend the cuts for all. Republicans argue if you are going to extend the cuts, you need to extend them for everyone, while Democrats continue to argue that wealthy people don’t need a tax break. A key point here – “rich” means adjusted gross income under $200,000 for single taxpayers ($250,000 for married couples). See the table below for a comparison of the current 2011 tax brackets and those that would occur in 2011 if Congress takes no action.

2010 and 2011 tax brackets

Comparison of 2010 and 2011 tax brackets

We’ll have to stay tuned to see where this goes. Senate Minority leader Mitch McConnell continues to state that the Senate Republicans will not vote for anything less than a full extension of the cuts for all taxpayers, while House Minority Leader John Boehner has indicated he may be willing to vote for a bill that excluded an extension for the rich “if it’s the only option.”  

Extension of the Alternative Minimum Tax. We have had this issue every year for the past several years, and every year it gets extended. Nothing will happen until after the November election on this, but I do expect to see yet another extension for 2010.

With regard to the other expiring tax credits/deductions including research and development, tuition/education and classroom expense credits, I expect they will also be extended, but like the AMT, not until after the election.  

If the economy continues to falter, it is likely that we will see §179 (small business) expensing and perhaps even bonus depreciation used again as a stimulus device. However, it’s possible that these items may not be addressed until after the new Congress begins session in January (as was the case for 179 for 2010).   President Obama recently added his own proposal to the mix by presenting 100 percent bonus depreciation as something he would like to get passed now (effective 9/8/10 through 12/31/11).   Again, we’ll have to watch to see how this develops – the important factor being what revenue offset provisions have to be included in order to get it passed – since Republicans in both houses (along with many Democrats) have stated they will not vote for a bill that adds to the deficit.

Estate tax will be back. The only question is whether Congress will temporarily extend the rates in place in 2009 ($3.5 million and 45 percent) or allow them to reset to pre-Bush era:  $1 million and 55 percent.   Again, nothing is likely to happen on this until after the election, or even into the new Congress. There were those that said Congress would never allow the tax to stay repealed for 2010, yet here we are nine months into the year with nothing on the horizon.

Here at Rea, we continually monitor all of these issues. We will communicate updates as/when they become definite.

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