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Nov, 2010
High Wage Earners Should Prepare For Higher Taxes

As affluent investors plan for 2011 and subsequent years, they may need to pay extra attention to tax planning. Rates on income, dividends, estates, and other areas appear likely to rise in 2011 -- and health care legislation passed by Congress earlier this year included tax increases on high income earners that are scheduled to take effect in 2013. There is always the chance that current rules can change, so you may want to monitor those that apply to you.

Ordinary Income

Next year, barring any legislative changes, the two highest tax rates will get even higher. The current 33% rate will jump to 36%, while the highest bracket, 35%, will increase to 39.6%.

Capital Gains

Tax rates on long-term capital gains, earned on investments held for more than one year, currently are taxed at 15%, but are scheduled to increase to 20% in January. Taxes on short-term capital gains, which are profits on investments held for one year or less, will continue to be taxed as ordinary income, where rates are scheduled to increase as outlined above.


Qualified dividends for those in the highest tax brackets currently are taxed at 15%, but will increase to an investor's marginal tax rate in 2011. For many investors, that means tax rates on dividends could more than double. One way to minimize the hit is to consider maintaining investments that pay dividends, such as dividend-paying stocks or real estate investment trusts, in accounts where withdrawals are tax deferred or tax free, such as an IRA or an employer-sponsored retirement plan.

New Taxes on Unearned Income

To help fund the provisions of the health care legislation passed in March 2010, two new taxes are scheduled to take effect in 2013. These taxes will be imposed on single taxpayers with a modified adjusted gross income (MAGI) of more than $200,000 and married couples with a MAGI of more than $250,000.

Workers earning above these thresholds will be hit with two new taxes. The first is an additional 0.9% tax on their wages, the second is a 3.8% tax on investment income in excess of these amounts. Net investment income includes interest (except for interest on municipal bonds), dividends, rents, royalties, capital gains on sales of financial assets, and passive income from rents and businesses.

Note that the 3.8% tax could also apply to a gain on the sale of a primary residence if the gain exceeds the current exclusion of $250,000 for single taxpayers or $500,000 for married taxpayers. The tax could also apply to a trust or estate regardless of how much net investment income is generated.

Estate Planning

Although the estate tax was rescinded for one year in 2010, it is scheduled for reinstatement in 2011 on taxable estates worth more than $1.1 million. Depending on the value of the estate, the maximum estate tax rate will be 55%.

If you want to help minimize how this will impact your estate, there are some strategies you can employ. For instance, consider gifting assets to loved ones or to charity to remove them from your taxable estate. Donating appreciated stocks to a charity is one technique for avoiding the capital gains tax and claiming a charitable deduction. In addition, individual taxpayers can gift a maximum of $13,000 a year to a noncharity beneficiary (such as a child or grandchild) without triggering the need to file a gift tax return. Couples can gift $26,000 annually. There is a lifetime gift tax exclusion of $1 million and gifts in excess of these amounts are subject to a gift tax. The top gift tax rate currently is 35%, but is scheduled to increase to 55% in 2011.

This communication is not intended to be tax advice and should not be treated as such. Each individual's tax situation is different. You should contact your tax professional to discuss your personal situation.

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©2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement

Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.