President Obama has made it clear in his 2011 budget proposal that he intends to raise the tax rate on the two highest income brackets. Technically what he proposes is to extend the 2001 Bush tax cuts that are set to expire at the end of this year for everyone but folks who fall into the two highest income tax brackets. Those unlucky ducks will see their marginal tax rate revert to their pre-tax-cut levels. That means the current 33 percent bracket nudges up to 35 percent and the new top rate will return to 39.6 percent from today's 35 percent.
Of course, this being the Congress of No, there's no guarantee what will happen with the sunsetting tax laws. But the early money in Washington is that this has a very good chance of skating through. Yes, Republicans won't be happy, but it's expected that they will cede the higher income tax rates on the wealthiest tiers, given that the President's budget proposes to keep the rate on qualified dividends from also reverting to their pre-2001 treatment when they were taxed as ordinary income. Right now the top dividend rate is 15 percent and the White House has proposed it rise slightly-along with the capital gains rate-to 20 percent. That's still a hell of a lot better than paying as much as 39.6 percent if the dividend law reverted to its pre-2001 level.
Accelerate income into 2010 If you're likely to fall into those two higher brackets in 2011, you want to be extra careful how you handle your income this year. Certainly, this is one year where pushing bonuses into the next tax year might not make sense.
The government's offer of letting anyone who converts a traditional IRA to a Roth this year to delay (and spread) their tax due over the 2011 and 2012 tax year could also be a mistake. You need your tax advisor to run the numbers, but it might make more sense to pay the tax this year at the lower rate, rather than delaying payment and then having to pay at a higher rate in 2011 and 2012. (No, you do not get to pay the rate that was in effect at the time of conversion; if you wait until 2011 or 2012, you pay tax based on the rates in effect at that time.)
And of course, if you have money in taxable accounts that you've been meaning to rebalance, this is the year to get it done.