Beware of the Tax Traps that Lie Ahead

By Alan L. Olsen
Managing Partner
Greenstein, Rogoff, Olsen & Co., LLP
Posted: 8/23/11

Are the rich paying enough in tax? Billionaire Warren Buffett announced that he pays a lower tax rate than his cleaning lady.1 With high net worth individuals facing multi-million dollar tax bills, this issue is debatable, but the point of the matter is that with the rising Federal Deficit, Uncle Sam will be looking for more ways to put National spending in line with Annual tax revenues. Tax hikes from prior legislations are already in place and new increases are on the horizon.

Here are some of the upcoming tax hikes to be aware of:

1. Social Security tax to increase on January 1, 2012

A temporary 2% cut in the social security tax will expire on January 1, 2012. If a person is earning $106,800 or above, (maximum wage subject to Social Security) they will see a tax hike of $2,136. The additional tax will raise an additional $111 billion in social security tax revenue.

2. AMT Tax to increase

The AMT patch was signed into law on December 17, 2010. The temporary patch raised the AMT exemption to $74,450 for 2011 for married joint filers and $48,450 for single filers. This patch will expire at the end of 2011, returning exemptions to the 2000 levels of $45,000 for joint filers and $33,750 for single filers.2

3. Capital Gain rates set to expire

For taxpayers who fall above the 15% tax bracket, the capital gains tax rate for non-corporate taxpayers is currently 15%. This rate will expire at the end of 2012 unless changes are made by Congress, bringing the capital gain tax rate up to 20%.

4. Gift and Estate tax rates to increase

With the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, when an individual dies, estates are currently taxed at a 35% rate with a $5 million exemption per individual. As of January 1, 2013, the estate tax rate will increase to 55% and the exemption will drop down to $1 million, unless changes are made by Congress.

5. Qualified Small Business Stock tax exclusion to expire

The Tax Relief Act currently allows a 100% gain exclusion for Qualified Small Business Stock purchased after September 27, 2010 and before January 1, 2012. This tax cut will expire at the end of 2011. Also, the stock must be held for over 5 years to qualify.3 For stock purchased after 2011, the exclusion is 50%.4

6. Health Care surtax coming on January 1, 2013. 3.8% extra levy on investment income and .9% surtax on salaries above $250,000.

The Healthcare Reform Act brings with it a 3.8% tax on investment income. Those with salaries above $250,000 (married filing jointly status) will have to pay the tax on the lesser of the $250,000 threshold amount (for married filing jointly) or 3.8% of the investment income. The threshold amount is different for different filing statuses. Additionally, the Medicare tax will increase by .9%.5

7. Expiration of 2001 and 2003 Bush tax cuts

The Economic Growth and Tax Relief Act (EGTRAA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRAA) were extended until the end of 2012. These tax cuts will expire in 2012, so be on the lookout for increased taxes in 2013.

As you begin your tax planning for 2011, make sure to take advantage of tax cuts that are available before they expire. Contact a qualified CPA to assist you in your tax planning.


1Baker, Brent. “Networks Embrace Buffett's Call for Higher Taxes on 'Mega-Rich,'”. Wall Street Journal. August 17, 2011. Web. August 2011. http://online.wsj.com/article/SB10001424053111903392904576512823989633638.html?mod=googlenews_wsj
2What is the latest news about AMT legislation in Congress? Mystockoptions.com. August 2011. Web. Nd. http://www.mystockoptions.com/faq/index.cfm/catID/DFE2FBA7-9773-4AE3-BBE66CABB4CE79B8/objectID/D943A51D-30A9-11D4-B9080008C79F9E62 3http://ritabyerscpa.com/Tax_Breaks.html 4http://www.taxpolicycenter.org/taxtopics/Expiration_Bush_Tax_Cuts.cfm 5http://www.weisslerlawgroup.com/NewslettersforClients/Current-Planning-to-Avoid-the-Future.shtml

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