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Monday
Oct252010

Unresolved Tax Questions Worry Taxpayers

Photo Courtesy - Getty Images(FALMOUTH, Mass.) -- Predicting your annual federal tax bill is rarely anyone's idea of a good time.  Now the process has been made all the more confounding, thanks to a host of questions over what the tax code will look like in 2011.

If Congress doesn't take action soon on an array of tax cuts and tax credits set to expire this year, "it's going to create a whole lot of confusion," said David McPherson, the founder of Four Ponds Financial Planning in Falmouth, Mass., and an ABC News columnist.  "Although we would like to see some clarity on these tax issues before end of year, there's no guarantee that there will be."

Here's rundown of some of the key tax issues that have tax planners and taxpayers wishing for a crystal ball:

Bush-Era Income Tax Cuts: It's the most high-profile tax question of the year:  What is the fate of the tax cuts passed under the Bush administration?

The cuts affected everyone from the poorest Americans to the richest, and now Congress must decide whether to renew all, some or none of the cuts.  If the cuts expire, the lowest marginal rate will rise from 10 percent to 15 percent.

If lawmakers do nothing, all Americans will see their income tax rates rise in 2011, said Melissa Labant, a technical manager in the tax division of the American Institute of Certified Public Accountants

"I would expect them to do something," Labant said.  "It's such a hot topic for everyone."

Child Tax Credit:  The Bush adminstration's tax cuts of 2001 also included a gradual increase of the child tax credit from $500 to $1,000 this year.  Without lawmakers' intervention, the credit is scheduled to drop back to $500.

Making Work Pay Tax Credit: Passed under the current adminsitration and instituted in 2009 and 2010, the Making Work Pay tax credit provided up to $400 to individuals and $800 to married couples.  Touted as part of the government's efforts to fight the recession, the credit is not expected to be renewed in 2011.

Marriage Penalty: Before the Bush tax cuts, married couples filing jointly paid more in taxes than unmarried couples earning the same incomes, leading to the phrase "marriage penalty."

The Bush tax cuts, Labant said, raised the standard deduction for married couples to twice that of single filers.  It also expanded the 15 percent tax bracket for married couples so that less of their money would be subject to the next, higher tax rate (25 percent in 2010.)  The deduction and the tax bracket could both shrink in 2011.

Itemized Deductions and Personal Exemptions: The Bush tax cuts lifted limits on how much high-income taxpayers could deduct for charitable contributions, mortgage interest and state and local taxes. The cuts also allowed, in 2010, for high-income taxpayers to be eligible for the same personal exemptions as other lower-earning Americans.

In 2011, the deduction limits could be reinstated and the exemption "is set to expire in that it starts to get reduced based on your income," Labant said.

Estate Tax:  Thanks to a Congressional deadlock last year, 2010 is a year free of estate taxes. However, they're scheduled to return in 2011, with all estates valued above $1 million to be subject to a maximum tax rate of 55 percent. In 2009, the estate tax exemption was $3.5 million. The Obama administration is pushing for a return to that exemption instead of the $1 million threshold.

Labant said that people are often surprised to learn that their assets might be worth more than $1 million, making their estates vulnerable to the tax after death.

"Maybe you don't have liquid assets or investments worth one million dollars, but how much is your house worth? How much is your jewelry worth? Your weekend place? Your insurance?" she said. "Sometimes people are worth more dead than alive and when you add up all those assets you may be worth more than $1 million."

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