2011: Major tax shocks coming, by Richard Moore of Lakeland Times

2011: Major tax shocks comingMajor increases will hit most Americans next year

Richard Moore, Investigative Reporter
Friday, September 03, 2010

Guess what could be coming to a paycheck near you?

Some of the largest tax increases in American history, by almost all objective analyses, unless Congress acts.
Federal tax hikes set to take effect in 2011 would hit virtually every working American, regardless of the level of household income.

Because of the protracted health care debate this past year, many citizens missed the words and actions - in some cases, inactions - of the Obama administration and Congress on taxes, so here's a summary of the changes scheduled to take place next year.

That's when most of the so-called Bush tax cuts enacted in 2001 and 2003 are set to expire, and neither the Obama administration nor Democratic congressional leaders have appeared eager to extend them, especially for higher income citizens.

If Congress does nothing, personal income tax rates are going to climb for everyone who pays taxes. The top income rate would increase from 35 percent to 39.6 percent (those making more than $379,650), but the percentage jump is even larger for the lowest tax bracket.

The 10-percent tax bracket, for instance, would vanish and those people would move into the 15-percent bracket, a 50-percent jump. That bracket would apply to everyone with incomes below $34,550.

Others bracket moves are more moderate: the 25-percent bracket rises to 28 percent; the 28-percent bracket, to 31; the 33-percent bracket, to 36.

The phase-out of many itemized deductions and of the personal exemption would resume as well, helping to further boost taxes.

And that's not all.

The child tax credit would be reduced from $1,000 per child to $500 per child, while the so-called "marriage penalty" - the difference between what you pay in taxes as a married couple and what you would pay as two single persons making about the same amount - will make a comeback.

The standard deduction would no longer be doubled for married couples relative to the single level. The standard deduction for couples would now stand at 167 percent of the standard deduction for singles, rather than at 200 percent.

The dependent care and adoption tax credits would be cut, too - dependent care from $3,000 to $2,400 - while credits to purchase energy-efficient home appliances would end, along with tax credits to hire unemployed veterans and young people.

It doesn't stop there, and don't think death is a sure fire way to escape the tax man, either. Right now, there is no death tax, but next year that grim reaper would return with a 55-percent rate on estates exceeding $1 million in value.

Opponents of the death tax say it would fall especially hard on those who inherit small businesses, because often they have to sell the business to pay the tax.

The end of the Bush tax cuts also means higher tax rates on savings and investments. For example, the capital gains tax would rise from a maximum of 15 percent this year to a maximum of 20 percent. In addition, qualified dividends would journey from a 15-percent rate to the taxpayer's regular bracket rate, or, for many, an increase of 167 percent.

Then, too, the ability of small businesses to expense certain purchases up to $250,000 would be rolled back to purchases not exceeding $25,000. Larger businesses, who are now able to expense half of their purchases of equipment, could no longer do so but would have to depreciate such purchases.

Education? Reading, writing and arithmetic will all add up to higher taxes when you read the fine print and write your check. For instance, the deduction for tuition and fees will be gone, and education tax credits limited. Teachers will be unable to deduct classroom expenses, and hundreds of thousands of households will forego eligibility for the student loan interest deduction.

Charitable contributions from IRAs would no longer be permitted. Right now, a retiree with an IRA can contribute up to $100,000 a year to a charity from an IRA.

Not set in stone

None of this is a done deal.

The truth is, there are few people in the dominant Democratic Party who want to see all the tax cuts go away, despite Internet hyperbole to the contrary.

While many Republicans want to extend all the cuts, President Barack Obama has urged lawmakers to keep the tax cuts for lower brackets - keeping the 10, 15 and 25 percent brackets - and to reconfigure the 28-percent bracket to comprise married couples with household incomes of less than $250,000 and single taxpayers with incomes of less than $200,000.

Rates on income higher than that would rise to 36 percent and 39.6 percent from their levels of 33 percent and 35 percent.

There is no predicting whether Congress will side with the president or chart a compromise course, but talk of compromise is getting louder as mid-term elections approach.

Supporters of the tax cuts also got an unexpected boost two weeks ago from the Congressional Budget Office, which issued a report saying extending the cuts would boost the gross domestic product and reduce unemployment.

"In addition, under current law, both the waning of fiscal stimulus and the scheduled increases in taxes will temporarily subtract from growth, especially in 2011," the CBO report stated. " . . . .If, for example, (the tax reductions enacted earlier in the decade were continued, the alternative minimum tax was indexed for inflation, and future annual appropriations remained the share of GDP that they are this year), growth of real GDP in 2011 would be 0.6 to 1.7 percentage points higher than it is in the baseline forecast, and the unemployment rate at the end of 2011 would be 0.3 to 0.8 percentage points lower."

Stay tuned. The stage is set for a September Senate debate over the expiration of the tax cuts.

Other taxes

No matter the outcome on the Bush tax cuts, as the CBO report observed, the Obama administration and Congress must also decide whether to pass legislation to index the aforementioned alternative minimum tax for inflation, which legislators regularly do.

If they do not, millions more are going to be paying the tax, which was enacted in 1969. The levy was intended to give taxable income a broader range with fewer allowable deductions and was meant to affect only higher income taxpayers.

Under the system, taxpayers must figure their taxes the normal way as well as by using the AMT formula and then pay the higher tax. By not indexing the tax to inflation, however, it has caught up to many more Americans as incomes have risen through the years.

In 1970, 155 Americans paid the AMT, Fox News has reported, while CBO numbers indicate it hit 4.5 million citizens in 2009.

For that year Congress excluded most couples earning a combined $70,950 and less and individuals making $46,700 or less from the AMT.

Without a change in the law, it's going to be a lot more, CBO director Douglas Elmendorf said on the CBO website.

"About 4.5 million taxpayers were affected by the AMT in 2009," Elmendorf wrote. "That number has been kept relatively small by annual modifications to the AMT rules, but the most recent modifications expired at the end of calendar year 2009. Consequently, about 27 million taxpayers - one out of every six taxpayers - will be affected by the AMT in 2010, paying on average an additional $3,900 in tax."

Nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax, he stated, and the total cost will come to $102.2 billion from those 27 million taxpayers.

"Of those taxpayers, nearly two thirds will make between $50,000 and $100,000 this year," Elmendorf wrote.

Health care.

The Obama administration and Congress injected the new health care law with a syringe full of taxes, too - more than 20 in fact.

There is a tanning tax, already in effect, subject to a 10-percent excise tax when tanning at a salon.
In addition, citizens will no longer be able to use a health savings account, a flexible spending account, or health reimbursement pre-tax dollars to purchase nonprescription, over-the-counter medicines.
And if you take money out of a health savings account early for a nonmedical reason, the additional tax is slated to rise from 10 percent to 20 percent.

Add to that a multi-billion dollar tax on name-brand drugs and many taxpayers might likely soon feel the pain of the new health care law.

Also built into the health care law was a 3.8 percent tax, starting in 2013, on the unearned income of individuals who earn more than $200,000 - for married couples filing jointly, $250,000 - including interest, dividends, annuities, royalties and rents.

The tax will be allocated to the Medicare Trust Fund.
All totaled, according to the CBO, reviewing all of the provisions related to health care and revenues, the legislation is estimated to increase mandatory outlays by $401 billion and raise revenues by $525 billion.

Richard Moore can be reached at rmmoore1@verizon.net.

--------------------------------------------------------------------------------

Content © 2010


Republican Women of the North, Northern WI, rwotnorth@gmail.com