Tax TurmOIL - A Midyear Update

Jim Brandenburg, CPA, MST Tax Shareholder   email | bio
July 2010

As the vuvuzelas blow at the World Cup, the oil continues to spread in the Gulf. While the oil spill has created financial, environmental, and even political damage, the attention drawn to this crisis has diverted the focus and efforts of several major tax matters.  Below are several of the tax proposals on the docket, including a few that are currently pending in Congress.

Extender Legislation - Several significant business and individual tax measures expired at the end of 2009, and currently, Congress is debating whether or not to extend the expired measures retroactively.  Business measures include an extension of the research tax credit, and individual provisions include sales tax deductions and charitable transfers from IRAs of up to $100,000.  The overall cost of the extender bill has slowed its momentum and may cause the bill to be scaled back.  However, this bill will likely pass this year, perhaps by the August recess. 

Small Business Bill - Separate from the extender bill, Congress is seeking to pass a bill to assist small businesses.  Included are incentives for investments in start-up companies and small business tax penalty relief.  A few key legislators are advocating expanding this bill to contain "bonus" depreciation for 2010 qualified additions (retroactive to January 1, 2010), increased Section 179 expensing limitations, and relief on restrictions for tax credits to small businesses. 

Individual Income Tax Rates - In the early and mid 2000s income tax rates were reduced. Due to Congressional budget rules, however, these tax cuts were not permanent and are set to expire at the end of 2010.  Thus, as it stands now, individual tax rates will increase to a maximum rate of 39.6 percent, up from 35 percent.  These tax increases will impact all taxpayers, so Congress will address extending some tax relief to individuals in the lower tax brackets (10 percent, 15 percent and 25 percent).  This will be taken up in the fall so politicians can trumpet this bill as they go home for the final weeks of campaigning.

Tax Rate on Capital Gains and Dividends - The 15 percent tax rate on both of these items is also set to expire at the end of 2010.  Capital gains rates will rise to 20 percent in 2011 (a 33 percent increase), while dividends will rise to 39.6 percent in 2011 (a 164 percent increase).  Some proposals will seek to extend a lower rate on dividends beyond December 31, 2010.  The maximum dividend rate will likely rise above 15 percent, but perhaps not as high as 39.6 percent.  

Estate Tax - While estate tax legislation was expected to pass in 2009, it did not.  Congress is again considering certain estate tax proposals, but with the above list of unsettled tax bills and a full plate of other legislation, the prospects are uncertain. 

While all of these measures and more will be considered this year, Congress will move with a keen eye focused on the November elections.