Long-range income-tax planning for individuals has always been challenging, what with the steady stream of changes and last minute action by Congress. This year, it goes to an all-new level taking into account the sunset provisions for many current benefits – those provisions that were enacted with a specified ending date – and the President’s 2011 budget proposals.

The following lists a number of provisions that will impact long-range tax planning. However, one thing is for sure; for higher-income taxpayers, the tax bite is going up, and for some, substantially.

Tax Rates

Currently, the lowest tax bracket is 10% and the highest is 35%. Beginning in 2011, without Congressional action, the lowest bracket will be 15% (the 10% bracket goes away) and the top bracket increases to 39.6%. So where we currently have 10%, 15%, 25%, 28%, 33% and 35%, beginning in 2011, we will have 15%, 28%, 31%, 36% and 39.6%.

Administration’s Budget Proposal – The budget proposal would have the rates increase for 2011 as follows:

• The four bottom brackets of 10%, 15%, 25% and 28% would be retained.

• The 28% bracket would be expanded to assure that taxpayers won't see their taxes rise as a result of the increase in the top two brackets.

• The top two brackets, currently 33% and 35%, would increase to 36% and 39.6%.

• For married taxpayers filing jointly, the 36% rate would apply to taxable income above $231,300 ($250,000 less the standard deduction and two personal exemptions), indexed from 2009; and for single taxpayers, it would apply to taxable income above $190,650 ($200,000 less the standard deduction and one personal exemption), indexed from 2009.

• The 39.6% rate would begin at taxable incomes over $373,650 for married taxpayers filing jointly, heads of household and single filers, with the taxable income level indexed for inflation.

Alternative Minimum Tax (AMT)

Without Congressional intervention, the alternative minimum tax (AMT) exemption amounts for 2010 drop to $33,750 (down from $46,700) for unmarried taxpayers, $45,000 (down from $70,950) for joint filers, and $22,500 (down from $35,475) for married individuals filing separately. If the exemption amounts aren’t propped up again by Congress, an estimated additional 20 million taxpayers will be subject to the AMT in 2011. In addition, many nonrefundable personal credits claimed after 2009 can't exceed the excess of: (a) the individual's regular tax liability, over (b) the individual's tentative minimum tax, determined without regard to the AMT foreign tax credit. For 2009, this limitation didn't apply.

Anticipated 2010 AMT

Since Congress is bogged down with other issues and does not have time to deal with meaningful AMT relief, it is the general consensus, although not guaranteed, that Congress, as they have done in the past, will enact another one-year patch for the AMT. If this happens, the exemptions will be temporarily restored to the 2009 levels (as indexed for inflation), and nonrefundable personal credits will be allowed to offset the AMT as well as regular tax.

Capital Gains

Currently, most long-term capital gains are taxed at a maximum rate of 15%, and if the long-term capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a zero percent rate. Beginning in 2011 without Congressional intervention, long-term capital gains tax rates will be increased to 20%.

Qualified Dividends

Currently, qualified dividends are taxed using the same long- term capital gains rates as shown in the previous paragraph. However, beginning in 2011 and absent Congressional intervention, qualified dividends will be taxed at ordinary income rates.

Administration’s Budget Proposal

Beginning in 2011, a 20% tax rate would apply to long-term capital gains and qualified dividends of married taxpayers filing jointly with income over $231,300 as indexed for inflation and $190,650 for single taxpayers. These two income levels are determined in the same manner as the tax rate proposal above. Taxpayers below these income levels would be subject to the rates that currently apply (i.e., 0% or 15% rate) for long-term capital gains and qualified dividends.

Deductions & Exemptions

Under current rules, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) is 200% of the standard deduction for single taxpayers. In addition, for 2010, the phase-out of itemized deductions and exemption allowances has been eliminated for higher-income taxpayers.

Beginning in 2011, without Congressional action, the current rules will sunset and the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) will revert to 167% (down from the current 200%) of the standard deduction for single taxpayers, and thus restoring the marriage penalty.

Also beginning in 2011, without Congressional action, the phase-out of itemized deductions and exemptions will return for higher-income taxpayers.

Administration’s Budget Proposal – For 2011

• The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) would remain at 200% of the standard deduction for single taxpayers.

• The AGI-based reduction of itemized deductions and the AGI-based personal exemption phase-out would be reinstated only for higher-income taxpayers.

• The tax value of all itemized deductions would be limited to 28% whenever they would otherwise reduce taxable income in the 36% or 39.6% tax brackets. A similar limitation also would apply under the AMT.

• The optional deduction for state and local general sales taxes would be extended through 2011.

Other Expiring Individual Tax Benefits

Additionally, and without Congressional action, the following tax benefits have or will expire soon.

• Up to $5,250 of tax-free, employer-provided education assistance – expires after 2010;

• The above-the-line education expense deduction – expired after 2009;

• Teacher’s $250 above-the-line deduction for classroom supplies - expired after 2009; and

• The $500 maximum ($1,000 for joint filers) standard deduction add-on for property taxes paid during the year - expired after 2009.

Administration’s Additional 2011 Budget Proposal Items

• Make the saver's credit (maximum $1,000) refundable and raise the AGI phase-out limits;

• Expand the child and dependent care tax credit by increasing the AGI level at which the 35% credit starts to phase out to 20% from $15,000 to $85,000, thus raising the level at which the 20% rate takes effect to AGI in excess of $113,000 (currently $43,000);

• Making the American Opportunity Tax Credit for education (currently only available in 2009 and 2010) permanent; and

• Extending the Making Work Pay Credit (MWPC) through 2011 ($400 per person and $800 per family). The President would like this credit to be made permanent, but it is unlikely Congress will agree, due to the federal budget deficit.

• Other Expiring Small Business Tax Benefits – In addition to the expiring individual benefits, without a Congressional extension, the following business tax options have expired after 2009.

• The 50% bonus depreciation;

• The maximum Sec 179 expense deduction will drop to $134,000 (down from the $250,000 allowed in 2009). The investment-based phase-out will drop to $550,000 (down from $800,000 allowed in 2009); and

• The 15-year depreciable life for leasehold improvements and restaurant property.

Administration’s Small Business 2010 Proposal Items:

• A new $5,000 small business job creation tax credit. It provides a tax credit of up to $5,000 for new workers added in 2010, plus a reimbursement for payroll taxes on wage increases.

• Temporary extension of Code Sec. 179 expensing benefits for small businesses through 2010, permitting a maximum of $250,000 to be expensed with an investment-based phase-out level of $800,000.

• Extension of bonus depreciation for qualifying property placed in service through 2010.