Much has been written in the general press concerning the fate of the “Bush Tax Cuts” from legislation expiring during the current calendar year; 2010 is the last year for reductions in income tax rates for all taxpayers.

There is very little legislative time remaining before the mid-term elections this coming November.  While the Congress has indicated extensions of certain Bush-era tax rate cuts will continue for the majority of American taxpayers, there is much squabbling over continuing of rate reductions for those individuals earning $200,000 and up and those joint return filers earning over $250,000.  Democrats are generally for repeal of tax rate reductions for those aforementioned upper income earners.  Republicans are generally in favor of continuation of all Bush-era tax rate reductions.  Recent defections by certain Senate Democrats suggest that all tax rates cuts may be extended for a one-year period.

How Mid-Term Elections May Affect Timing of Tax Cut Continuation

Our view is that this contentious issue may not be settled before the mid-term elections due to the controversy surrounding the issue.  However, it is very likely to be settled before the start of calendar year 2011 since rates will go up for everyone starting January 1st.  This uncertainty is not acceptable given current economic conditions.  Our conclusion; given Democratic majorities in both houses currently, rate reductions will be approved to continue for the year 2011 for those individuals and joint filers earning below the $200,000 and $250,000 income levels, respectively.  Tax rates for dividend and capital gain income will probably be increased to the 20 percent rate for 2011 from the 15% rate today. The Republicans cannot hold out for extensions of all tax rate reductions given our assessment of the political fallout in failing to extend the rate reductions for lower and middle income earners.

The extension of estate tax exemptions and rates must be addressed by this Congress.  Currently there is no federal estate tax, but the former estate tax exemption of $1 million will return come January 1, 2011.  Our view is that legislation continuing the 2009 exemption of $3.5 million per taxpayer will be passed before that deadline.

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