What will the income tax rate be in 2011?

Only three months remain until the current marginal individual income tax rates that helped lower the tax rates of all taxpayers, from lower to middle to higher-income individuals and families, over the past ten years will expire. Congress has a number of options on the table, with some lawmakers favoring extension of the current rates for all taxpayers, while others favor only extending the current rates for the middle-class, and allowing the top two rates to revert to their previous higher levels. Still others are willing to extend none of the rates if a stalemate over the higher rate brackets ensues. The potential rate change makes tax planning all the more important, yet tax planning is also made uncertain by inaction on Congress’s part.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) gradually reduced the individual marginal income tax rates across the board and created a new – but temporary – 10 percent regular income tax bracket for a portion of taxable income that was previously taxed at 15 percent. These so-called “Bush tax cuts” – named after the Administration in which they first appeared – could only be placed into the Tax Code for a 10-year duration due to procedural rules in place at the time. As a result, those tax cuts expire at the end of 2010 and beginning in 2011, those income tax rates, as well as other individual tax cuts will revert back to pre-2001 levels.

Federal individual income tax rates for 2010 are:

Single individuals: If taxable income is:
– Not over $8,375: 10% of the taxable income;
– Over $8,375 but not over $34,000: $837.50 plus 15% of the excess over $8,375;
– Over $34,000 but not over $82,400: $4,681.25 plus 25% of the excess over $34,000;
– Over $82,400 but not over $171,850: $16,781.25 plus 28% of the excess over $82,400;
– Over $171,850 but not over $373,650: $41,827.25 plus 33% of the excess over $171,850; and
– Over $373,650: $108,421.25 plus 35% of the excess over $373,650.

Married couples filing a joint return: If taxable income is:
– Not over $16,750: 10% of the taxable income;
– Over $16,750 but not over $68,000: $1,675 plus 15% of the excess over $16,750;
– Over $68,000 but not over $137,300: $9,362.50 plus 25% of the excess over $68,000;
– Over $137,300 but not over $209,250: $26,687.50 plus 28% of the excess over $137,300;
– Over $209,250 but not over $373,650: $46,833.50 plus 33% of the excess over $209,250; and
– Over $373,650: $101,085.50 plus 35% of the excess over $373,650.

Unless extended (or made permanent, which is not likely at this time), all the individual marginal income tax rates will rise after December 31, 2010. The 10 percent regular income tax bracket will disappear and the first part of an individual’s taxable income will be taxed at 15 percent rather than at 10 percent.

After EGTRRA sunsets (after December 31, 2010) and without any modification by Congress, the federal individual income tax rates for 2011 will be:

Single individuals: If taxable income is:
– Not over $34,850: 15% of the taxable income;
– Over $34,850 but not over $84,350: $5,227.50 plus 28% of the excess over $34,850;
– Over $84,350 but not over $176,000: $19,087.50 plus 31% of the excess over $84,350;
– Over $176,000 but not over $382,650: $47,499 plus 36% of the excess over $176,000; and
– Over $382,650: $121,893 plus 39.6% of the excess over $382,650.

Married couples filing a joint return: If taxable income is:
– Not over $58,200: 15% of the taxable income;
– Over $58,200 but not over $140,600: $8,730 plus 28% of the excess over $58,200;
– Over $140,600 but not over $214,250: $31,802 plus 31% of the excess over $140,600;
– Over $214,250 but not over $382,650: $54,633.50 plus 36% of the excess over $214,250; and
– Over $382,650: $115,257.50 plus 39.6% of the excess over $382,650.

President Obama wants a permanent extension of the current 10, 15, 25, and 28 percent rates. Under his proposal, these rates would continue for individuals without interruption after December 31, 2010. He would also raise the cut off level for the 28 percent bracket. However, the 33 percent rate bracket and the 35 percent rate bracket become 36 percent and 39.6 percent, respectively, after December 31, 2010.

Under the president’s proposal, the individual income tax rates for 2011 would be:

Single individuals: If taxable income is:
– Not over $8,575: 10% of the taxable income;
– Over $8,575 but not over $34,850: $858 plus 15% of the excess over $8,575;
– Over $34,850 but not over $84,350: $4,799 plus 25% of the excess over $34,850;
– Over $84,350 but not over $195,550: $17,174 plus 28% of the excess over $84,350;
– Over $195,550 but not over $382,650: $48,310 plus 36% of the excess over $195,550; and
– Over $382,650: $115,666 plus 39.6% of the excess over $382,650.

Married individuals filing a joint return: If taxable income is:
– Not over $17,150: 10% of the taxable income;
– Over $17,150 but not over $69,700: $1,715 plus 15% of the excess over $17,150;
– Over $69,700 but not over $140,600: $9,598 plus 25% of the excess over $58,200;
– Over $140,600 but not over $237,300: $28,472 plus 28% of the excess over $140,600;
– Over $237,300 but not over $382,650: $55,548 plus 36% of the excess over $237,300; and
– Over $382,650: $106,725 plus 39.6% of the excess over $382,650.

With uncertainty remaining as to the state of the tax rates for 2011, tax planning can be made significantly more difficult. However, a number of tax strategies, such as accelerating income into 2010 to avoid possible higher rates next year, can be implemented now even in these uncertain times.