2011 Tax Outlook for Seniors

Most seniors will get no special breaks from the recently enacted tax package. Still, tax experts note that the extension of current tax rates will create a stable planning environment. They advise seniors to take advantage of the next two years to build a plan that will help them reduce taxes as they liquidate investments to meet retirement expenses. In particular, lower-income seniors will enjoy zero tax rates on qualifying capital gains and stock dividends.
Wealthy seniors, by contrast, will get very favorable treatment on estate taxes. Congress allowed the estate tax to lapse in 2010 but without this years tax package, estate taxes would have returned in 2011. If that had happened, only the first $1 million of an estate would have escaped taxation and the rest of the estate would have been taxed at a 55-percent rate.
[See 10 Key Retirement Ages to Plan For.]
Under the new rules approved earlier this month, there will be a $5 million exclusion and the tax rate on the excess will be 35 percent. With each spouse entitled to that $5 million exclusion, the first $10 million of most estates will be shielded from taxes. During 2011, estates have the option of being taxed under the new rule or the 2010 rules, when there was no estate tax. As appealing as that zero tax rate was in 2010, some other provisions of the law were very unattractive, and many estate experts will prefer to use the new rules.
Very few people, however, are wealthy enough to be affected by the new estate tax rules. For most seniors, the benefit of the new law is in locking in low tax rates for the next two years. Many forecasters project that higher tax rates eventually will be needed to help reduce federal budget deficits. So, 2011 and 2012 are viewed as an ideal time to lock in favorable tax treatments.
[See Retirees Largely Shut Out of Obama Tax Compromise.]
Older taxpayers "are the ones who plan better than anyone else," says Bob Meighan, an accountant and vice president of TurboTax, the tax software company. He says seniors should focus on the continuation of the 15-percent tax rate on qualified dividends and capital gains. Generally, assets held more than a year qualify for capital gains taxation when theyre sold. There also is a holding period that determines if a stock dividend is qualified for this ...