Predicting what will happen with taxes in a given year can be a mixed bag. This isn’t the case with 2011, where things appear fairly clear. Here’s our overall tax prediction for 2011.

It is amazing to see the impact of a single election. The gains by the Republican Party in the November elections has resulted in a major change of course when it comes to political issues in this country. That necessarily includes a change in direction on taxes as well. Whereas the forecast for 2011 looked very murky, it is now becoming much clearer. 

At issue is the Bush Tax Cuts. As you probably know, these tax cuts are set to expire at the end of 2010. Given our huge national debt, many have viewed this as a good thing since it will cut the annual deficit significantly. Ah, but there is a problem. We have this small Great Recession deal that has pretty much slapped around the economy like a Three Stooges film. Raising taxes now could hurt the anemic recovery that is underway. 

Unless things change at the last moment, it appears the Bush Tax Cuts will be extended through 2011 and perhaps 2012. In exchange, the Republicans are agreeing to extend jobless benefits to the unemployed. In short, both the Republicans and President Obama get what they want without giving up too much. Our national debt will continue to spiral out of control, but apparently we will deal with that later!

The tax situation for 2011 cannot be discussed without mentioning the situation at the state level. The majority of states are effectively bankrupt. This is particularly troubling since they cannot borrow money like the federal government. There is only one way out of such a conundrum – raise taxes. You are probably already experiencing this in your state in 2010. Expect it to continue in 2011 as states struggle to meet their financial obligations while slashing spending. 

So, what do we end up with? Taxes at the federal level should remain about the same, but you will pay more to your state. On the federal level, it is vital to understand that higher taxes are coming. The math between our debt and revenues simply requires it. Whether that is in two years or ten is anyone’s guess, but make sure you keep the long term in mind.