Income tax rules will probably change substantially in 2010. If Congress takes no action, taxes will rise substantially in 2011 when the tax cuts of 2001 and 2003 expire. Expect a great deal of press coverage and consumer anxiety as they try to understand what this may mean for them.
Providing consumers with information to help them deal with their finances is good for them and good for your institution. It helps them put their financial situation into a broader perspective and make better informed decisions. This type of information positions your products as solutions and demonstrates your institution’s dedication to consumers total financial well being resulting in stronger, deeper and longer relationships.
The year of 2010 promises to be one when the income and estate tax laws will be a hot topic of political discussion and probably Congressional action. Several provisions of the current income tax rules are scheduled to change on January 1st, 2011; current laws call for the estate tax to disappear for 2010 and to be reinstated (with 10 year old exemptions and rates) in 2011; and the federal government is facing very large fiscal deficits. The outcome of any Congressional actions on taxes will probably affect every taxpayer.
The Economic Growth and Tax Relief Reconciliation Act of 2001 contained provisions to reduce the marginal income tax rates (from 15% to 39.6% to 10% to 35%). It also reduced estate tax rates from 55% in 2000 to 45% for 2009, with the estate tax entirely disappearing for 2010. The size of estates subject to tax increased from $675,000 for 2000 to $3.5 million for 2009. These changes expire at the end of 2010 with income and estate tax rates scheduled to revert to 2000 levels on January 1st, 2011.
Without Congressional action, some income tax increases will occur automatically at the end of 2010. This includes income tax rates reverting to 2000 levels. The lowest marginal rate would increase from 10% to 15% and the top rate would increase from 35% to 39.6%. Long term capital gain would be taxed at a top rate of 20% instead of 15%, and dividends would be subject to regular tax rates (up to 39.6%) instead of the preferential top rate of 15%.
The estate tax environment would also change dramatically. The current law provides for no estate taxation in 2010 and the reinstatement of the 2000 rules in 2011. Under those rules, estates would begin to be subject to tax when the taxable estate exceeded $675,000 with a top estate tax rate of 55%.
Other factors to consider
Continuing federal deficits are being funded by the Treasury Department issuing government bonds. To date, US bonds have been considered to be among the safest investments available resulting in the Treasury being able to issue bonds with relatively low interest rates. If the federal government continues to borrow more, there is the potential for the interest rates they must pay on their borrowing to increase. This puts pressure on the government to reduce the deficit, either by spending less or raising more funds through income taxes.
The political environment also plays a significant role in the future of what happens with income taxes. Few politicians look forward to the prospect of increasing taxes, especially on large numbers of voters. As a result, there may be a tendency to skew any tax increases toward those with higher levels of taxable income. The current focus on health care reform may also have tax ramifications. Some health care proposals include increasing income taxes on those with high levels of income to help pay for the reform.
The coming months promise to be interesting as Congress addresses some of these issues. Most commentators expect Congress to address some or many of these tax issues before the end of 2010. The end result is unknown, but it is wise to follow these discussions and be aware of how any actions may affect the financial future of your customers. There will be many chances to communicate these changes to your customers and become the financial go to person in their lives. Some well timed, sound advice will ensure that you have your customers trust and loyalty for years to come.
