Capital Corner: Back to the Future

Jim Brandenburg, CPA, MST Shareholder - Tax   email | bio
September 2010

Even with continual technological advancements, some changes seem to bring us back to bygone eras.  Take the television for instance - back in the 50s folks wore glasses to watch 3D TV and movies.  Now, 60 years later, people are again wearing glasses to view the new high definition 3D TVs and movies.  We will need those 3D glasses to watch the political action as Congress returns to Washington with many unsettled tax matters.  Taxpayers and practitioners alike await the coming months to see what changes may or may not be made. Combine this with high profile elections, and you can see that the political landscape will be in high definition this fall.  It will be power politics live and in color, with the surround sound turned on.  Here are just a few of the tax issues facing Congress this fall (and for nostalgia, each is coupled with a TV advancement).

Color TV

Extending the "Bush Tax Cuts" is not a black and white decision, as there are many shades of grey surrounding this issue.  You may recall President Bush cut tax rates in 2001, and again in 2003.  These cuts were an across-the-board reduction in income tax rates and a reduction in the marriage tax penalty.  Due to congressional budget rules, however, these cuts were limited and are set to expire at the end of 2010.  Congress is now debating whether to extend these lower rates into 2011 for all or just some of the brackets.  To blur the picture even further, the 15 percent tax rate on investment income is set to rise to 20 percent for capital gains and to approximately 40 percent for dividends on January 1, 2011.  Cuts are likely to be extended for the lower brackets into 2011, but the top tax bracket may increase from a maximum of 35 to 40 percent. Capital gains will likely see a sharp rise to 20 percent, but the tax rate for dividends is unclear and may settle near the capital gains rate.

Chromacolor

Congress is feeling the pressure from business groups to provide some tax assistance.  As such, Congress may extend the 50 percent bonus depreciation on new equipment purchases retroactive to January 1, 2010.  In addition, Section 179 expensing could be expanded and limitations on tax credits could be eased.

Cable & Satellite

There are a variety of tax measures that expired at the end of 2009 that have yet to be extended in 2010. (There are almost as many tax items as the number of channels now available through cable TV and satellite.)  Among these provisions are the R&D tax credit for businesses, and the sales tax deduction for individuals.  (Click here for a link to a legislative analysis of extender items that need congressional action in 2010.)

Flat Screen

The Alternative Minimum Tax (AMT), in a way, is like a flat tax of 28 percent.  As mentioned in the last issue of the Adviser, the AMT exemption must be dealt with for 2010; otherwise, millions of unsuspecting taxpayers will have the plug pulled on them and be surprised that they are subject to the AMT.  The AMT provisions may be part of the extender legislation or perhaps moved to another channel and added to the debate over the "Bush Tax Cuts."

Plasma

January 1, 2011 could reintroduce the estate tax back to 2001 rates.  Look for Congress to enact estate tax legislation this fall with an exemption of $3 to $4 million and an estate tax rate of 35 to 45 percent.  Transition rules will be needed to implement the changes, but our antenna has picked up some signals that the estate tax repeal in 2010 may survive, although the dates and parameters remain unclear.

The summer reruns are over; the new season begins.  Stay tuned -- it will be an interesting fall.  By the way, has anyone seen the remote?