The Approach of 2011

by | Apr 11, 2008 | Cash Flow, Weekly Column

2011.jpgIt’s looming. It’s coming closer and closer. We don’t have much time left. It will be here before we know it.

What is it? The year 2011.

For all I know, somewhere back in the murky prophecies of Nostradamus, there’s a warning about this dark year. Actually, you don’t have to go back quite that far. There was ample warning in our February 28 teleclass. Our guest, Paul Thorstenson of Ketel Thorstenson, LLP, had plenty to say about the dangers of 2011.

What’s so scary about the year 2011? Tax laws. True, tax law is a frightening topic in and of itself. But one of the topics Paul discussed was the fact that several significant changes in the current tax laws are set to take place in 2011.

One such law relates to federal estate taxes. Currently the first two million dollars of an individual’s estate is exempt from estate tax. The exemption increases to 3.5 million dollars for 2009. For 2010, the estate tax is repealed completely. Then, in 2011, the tax returns, with an exemption on the first one million dollars.

There may not be a lot that individuals can do about this. (Though I suspect that at least three dozen writers ofman-getting-pockets-emptied.jpg murder mysteries are working diligently right now on stories where wealthy Great-Uncle Leonard’s murder is carefully planned to take place on or before December 31, 2010.) Still, especially for elderly people with sizeable estates, it would be wise to discuss some possibilities with a financial planner. One option might be to consider giving some money to one’s heirs now, rather than passing everything to them through the estate.

Paul, however, thinks it’s likely that cries of outrage will reach the ears of Congress with sufficient volume so they will take action on the estate tax sometime toward the end of 2009. His best guess is that the exemption will be locked in somewhere in the range of three to five million dollars.

Other tax provisions due to change in 2011 are the rates on long-term capital gains and on dividends. The current maximum capital gains tax is 15%. Under the current law, this rate will go to 20% in 2011. The tax rate on dividends is also currently 15%. In 2011, that will change, with dividends being taxed at whatever rates apply to taxpayers in various tax brackets.

clinton-obama.jpgAccording to Paul, both Senators Clinton and Obama have said that, if elected President, they will work to keep these higher rates. Obviously, the election hasn’t happened yet. And even after a new President takes office, we have no way of knowing what will happen with these tax laws. Still, it would be wise not to count on the rates staying at their current levels.

If you’re considering selling the family ranch or some other large holdings in the next few years, it would be a good idea to take capital gains tax changes into account. Have a discussion with a financial advisor about the timing of the sale and other options that might allow you to take more of the gain before the tax rate goes up.

The same is true when it comes to dividends. Anyone looking at taking significant amounts out of a C corporation, for example, might want to do so over the next three years to avoid the higher rates that are probable beginning in 2011.

Tax consequences are only one factor to consider in making investment decisions. In planning ahead, however, it’s a good idea to beware—or at least be aware—of 2011.

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