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2011 Income Tax Rates Prediction

Posted By Jim On 07/07/2010 @ 7:06 am In Taxes | 81 Comments

The official 2011 income tax brackets [3] have been released.

We talked about how capital gains taxes will increase in 2011 [4] (and how dividends will be taxed as ordinary income in 2011 too), but we haven’t talked much about the tax brackets themselves. Normally, in the fall, we go through the exercise of calculating the tax brackets once we know the inflation figures. This year it’ll be a little different as the Bush-era tax cuts will expire this year.

As you may remember, in 2001 and 2003, President Bush signed two tax bills that adjusted and then accelerated the adjustments to our tax brackets. Most notably, they added a 10% and 25% tax brackets and lowered the top tiers from 39.6% and 36% to 35% and 33%, respectively. The reason why the cuts were considered “for the rich” was because the top two tiers were lowered and because capital gains taxes were slashed. They were cut for everyone but 4.6% from the highest tier counts for more than at the lower brackets.

So where will taxes go in 2011? President Obama’s 2011 budget [5] seeks to expire the tax cuts in 2011, letting the top two tiers rise back to where they were before the cuts but has promised to leave tax rates the same for those making less than $250,000 (married) and $200,000 (single). This would mean that we would keep the 10% and 25% brackets, but replace the 35% with $39.6% and the 33% with the 35% brackets. It would look something like this:

2011 IRS Tax Brackets Prediction

Assuming only changes to the top two brackets but accounting for inflation over the 2010 tax brackets [3] (2% for the 12 months through May 2010 according to the BLS [6]), we get:

Tax Bracket Single Married Filing Jointly
10% Bracket $0 – $8,543 $0 – $17,085
15% Bracket $8,543 – $34,680 $17,085 – $69,360
25% Bracket $34,680 – $84,048 $69,360 – $140,046
28% Bracket $84,048 – $175,287 $140,046 – $213,435
35% Bracket $175,287 – $381,123 $213,435 – $381,123
39.6% Bracket $381,123+ $381,123+

Some other notable changes from the 2011 budget proposal:

  • Limit itemized deductions to the 28% rate, meaning high income households would see the value of their deductions limited. Before the 3% itemized deduction rule [7] phased out this year, high earners were already seeing their deductions phased out.
  • Keep the estate tax with a $3.5 million exemption level per person and a top rate of 45%, current law gives a $1 million exemption and a 55% top rate.
  • Make permanent the tax cuts in the 2001 and 2003 laws for those making less than $200,000 (single) and $250,000 (married).
  • You can read more from CNN Money [8] (these are unrelated to the actual brackets themselves).

What do you think of the new brackets?

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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/2011-income-tax-rates-prediction.html

[3] official 2011 income tax brackets: http://www.bargaineering.com/articles/federal-income-irs-tax-brackets.html

[4] capital gains taxes will increase in 2011: http://www.bargaineering.com/articles/2011-long-term-capital-gains-tax-rates.html

[5] President Obama’s 2011 budget: http://www.whitehouse.gov/omb/budget/overview/

[6] according to the BLS: http://www.bls.gov/news.release/cpi.nr0.htm

[7] 3% itemized deduction rule: http://www.bargaineering.com/articles/comprehensive-guide-to-irs-income-phase-outs-rules.html#itemizeddeductions

[8] CNN Money: http://money.cnn.com/2010/02/01/pf/taxes/obama_budget_tax_changes/index.htm

Thank you for reading!