At this time, there is uncertainty as to what Congress will do concerning individual income tax rates for 2011. The uncertainty arises from the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and whether Congress will act to change any of the sunset provisions.

EGTRRA reduced the marginal ordinary income tax rates from 39.6 percent, 36 percent, 31 percent and 28 percent to 35 percent, 33 percent, 28 percent, and 25 percent, respectively. If the EGTRRA reduced rates are allowed to expire, the 2011 rates will return to the 39.6 percent, 36 percent, 31 percent and 28 percent rates.

President Obama has proposed that the EGTRRA sunset would only apply to the current 33 percent and 35 percent rates so the top two brackets would rise to 36 percent and 39.6 percent, respectively.

Under EGTRRA, the maximum capital gains rate on capital gains other than on collectibles and unrecaptured section 1250 gain was 20 percent. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”) further reduced the 20 percent capital gain rate to 15 percent and applied a 15 percent rate to dividends in lieu of the ordinary income rates. Although the JGTRRA rates were scheduled to expire for 2009, the sunset was extended to years after 2010 by the Tax Increase Prevention and Reconciliation Act of 2005. If the reduced capital gain and dividend rates are allowed to expire, the general capital gain rate will return to 20 percent and the maximum rate on dividends will return to 39.6 percent.

President Obama has proposed that a rate of 20 percent would apply to capital gains and dividends for joint taxpayers with incomes of $250,000 or more and single taxpayers with income of $200,000 or more and that a rate of 15 percent would apply to taxpayers below such income thresholds.

The Health Care and Educational Reconciliation Act of 2010 (“HCERA”) imposes a 3.8 percent Medicare tax on unearned income of high income individuals or trusts beginning in 2013. In case of individuals, the tax is 3.8 percent of the lesser of (i) net investment income for such taxable year or (ii) the excess of adjusted gross income for such taxable year over $250,000 in case of taxpayers filing a joint return ($125,000 for married filing a separate return and $200,000 for singles). In the case of trusts, the tax is 3.8 percent of the lesser of (i) undistributed net investment income for such taxable year, or (ii) the excess of the adjusted gross income (as defined in Section 67(e) of the Code) for such taxable year over the dollar amount at which the highest tax bracket in Section 1(e) of the Code begins for such taxable year (currently $11,200). For this purpose, net investment income includes interest, dividends, capital gains, royalties, rents, annuities, trade or business income from passive activities and trading in financial instruments and commodities. The passive activity rules of Section 469 of the Code are to be used for determining whether an activity is passive and produces net investment income. Income or gain from a nonfinancial trade or business interest where the taxpayer is active in the business would not be subject to the 3.8 percent tax. For example, a S corporation shareholder who works full time in the S corporation's trade or business would not be subject to the 3.8 percent tax on such shareholders share of the S corporation income or on the gain on a sale of such shareholder’s stock in the S corporation.

The HCERA and Patient Protection and Affordable Care Act of 2010 impose an additional .9 percent Medicare tax on the employee’s portion of the Medicare tax on wages and on self employment income over $250,000 on a joint return ($200,000 for a single) beginning in 2013. As a result, a higher income employee's portion of the Medicare tax on wages in excess of the threshold will be 2.35 percent instead of 1.45 percent. Likewise, a higher income taxpayer subject to self employment tax will be taxed at 3.8 percent on self employment income in excess of the threshold instead of 2.9 percent.