So, What’s Happening with Tax Rates Next Year?

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This seems the be the question of the day.

The mid-term election results seemed to indicate that the country is not happy with the direction of the current administration and congress.  The election results will no doubt also make legislation more difficult, now that there is a split congress.

We know that there has been tax legislation passed this year that will impact taxes, such as the health care law and the recently enacted small business tax incentives.  But the big question on everyone’s mind seems to be what will happen to individual tax rates.  It seems that there are three possible scenarios:

1. The Bush era “tax cuts” will be allowed to expire (or sunset), resulting in individual tax rates returning to the Clinton era tax increase.

2. The current tax rates will be permanently or temporarily extended for all taxpayers.

3. The current tax rate system will be extended for middle class taxpayers only (which was the original proposal of the current administration), which would result in a tax rate increase for the top two tax brackets.

Some light has been shed on what scenario may now be more likely.  As reported on our blog previously, last week, the Obama Administration indicated their interest in working on a full extension of the Bush era tax cuts.  It appears that the most likely scenario now is that the 2010 tax rate system will be extended.  The second most likely scenario may be that due to legislative stalemates, no legislation is passed, and the current tax rate system is allowed to expire.

For a great summary of the potential tax rate structures under each possible scenario, visit this link to view a chart produced by Northern Trust.

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