Wednesday, August 25, 2010

If the tax cuts expire

(Note to readers: Because the tax code is so complicated, if you believe I have anything wrong in my analysis, please point it out and provide me a source so I can correct this information.)

Congress, currently controlled by Democrats, has not acted on any type of tax reform. With only about 120 days until tax rates revert back to 2001 levels, it remains to be seen what they will do. (They haven't even worked on a budget for the next fiscal year).

Not only will the tax rates change, but other taxes will also be implemented or increase.

This table shows the tax for different taxable income levels, the increase if the tax cuts expire, and the percentage increase in the tax bill.

Taxable Income2001 Tax2009 TaxIncrease% Increase
Source: IRS 1040 tax schedules

Other tax provisions that will come to be (from The Snow Report and Kiplinger Mag):

Marriage penalty and child deduction: The “marriage penalty” (narrower tax
brackets for married couples) will return from the first dollar of
 income. The child tax credit will be cut in half from $1,000 to $500 per
child. The standard deduction will no longer be doubled for married couples
relative to the single level. The dependent care and adoption tax credits
will be cut.

Return of the "death" tax: The return of the estate tax. This year, there is no estate tax. For those dying on or after Jan. 1, 2011, there is a 55 percent top death tax rate on estates more than $1 million. A person leaving behind two homes and a retirement account could easily pass along a huge tax bill to their loved ones.

Higher tax rates on savers and investors: The capital gains tax will rise
from 15 percent this year to 20 percent in 2011. The dividends tax will
 rise from 15 percent this year to a  maximum 39.6 percent in 2011. These rates will
rise another 3.8 percent in 2013.

Second Wave: Obamacare

There are more than 20 new or higher taxes in Obamacare. Several will first
go into effect on Jan. 1, 2011.

The “Medicine Cabinet Tax.” Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA),
or health reimbursement (HRA) pre-tax dollars to purchase non-prescription,
over-the-counter medicines (except insulin).

The “Special Needs Kids Tax.” This provision of Obamacare imposes a cap on
 flexible spending accounts (FSAs) of $2,500. (Currently, there is no federal
 government limit). There is one group of FSA owners for whom this new cap
will be particularly cruel and onerous: parents of special needs children.
 There are thousands of families with special needs children in the United
 States, and many of them use FSAs to pay for special needs education.
 Tuition rates at one leading school that teaches special needs children in
 Washington , D.C. ( National Child Research Center ) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of
 special needs education.

The HSA Withdrawal Tax Hike. This provision of Obamacare increases the
additional tax on non-medical early withdrawals from an HSA from 10 to 20
 percent, disadvantaging them relative to IRAs and other tax-advantaged
 accounts, which remain at 10 percent.

Third Wave: The Alternative Minimum Tax and Employer Tax Hikes

When Americans prepare to file their tax returns in January of 2011, they’ll
be in for a nasty surprise -- the AMT – (Alternative Minimum Tax) won’t be held harmless, many
tax relief provisions will have expired.

The AMT will ensnare over 28 million families, up from 4 million last year.
 According to the left-leaning Tax Policy Center , Congress’ failure to index
the AMT will lead to an explosion of AMT taxpaying families-rising from 4
 million last year to 28.5 million. These families will have to calculate
 their tax burdens twice, and pay taxes at the higher level. The AMT was
created in 1969 to ensnare a handful of taxpayers.

Small business expensing will be slashed and 50% expensing will disappear.

Small businesses can normally expense (rather than slowly-deduct, or
"depreciate") equipment purchases up to $250,000. This will be cut all the
way down to $25,000. Larger businesses can expense half of their purchases
of equipment. In January of 2011, all of it will have to be “depreciated.”

Taxes will be raised on all types of businesses. There are literally scores
of tax hikes on business that will take place. The biggest is the loss of
the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief
 will cost jobs.

Tax Benefits for Education and Teaching Reduced. The deduction for tuition
and fees will not be available. Tax credits for education will be limited.
Teachers will no longer be able to deduct classroom expenses. Covered
Education Savings Accounts will be cut. Employer-provided educational
assistance is curtailed. The student loan interest deduction will be
disallowed for hundreds of thousands of families.

Charitable Contributions from IRAs no longer allowed. Under current law, a
 retired person with an IRA can contribute up to $100,000 per year directly
 to a charity from their IRA. This contribution also counts toward an annual
 "required minimum distribution." This ability will no longer be there.

Now your insurance is INCOME on your W2. One of the surprises we’ll find come next year is a little
 ”surprise” that 99% of us had no idea was included in the “new and
improved” healthcare legislation : the dupes, er, dopes, who backed this
administration will be astonished!

Starting in 2011, (next year folks), your W-2 tax form sent by your employer
will be increased to show the value of whatever health insurance you are
given by the company. It does not matter if that’s a private concern or
 governmental body of some sort. If you’re retired? So what; your gross will go up by the amount of insurance you get. (Note: This increase is not included in the table above).

You will be required to pay taxes on a large sum of money that you have
never seen. Take your tax form you just finished and see what $15,000 or
 $20,000 additional gross does to your tax debt. That’s what you’ll pay next
year. For many, it also puts you into a new higher bracket so it’s even

This is how the government is going to buy insurance for the 15% that don’t
have insurance and it’s only part of the tax increases.

It's legalized theft, in my book.


Anonymous said...

Your tax table conveniently left out the top 1%, that is the main recipient of the Bush tax cuts. Whoops....

Steve said...

Before you come here and make ignorant statements, you should check your facts. According to the CBO, the average income of the top 1 percent is 1.3 million.

So my tax table did not "conveniently" leave out the top 1 percent, since I included both 1 mil and 5 mil of taxable income.

The top 1 percent, btw, got less of a tax break than anyone else, and now pay more of the overall tax revenues than at anytime in the history of income taxes. But you'd know this you'd bother to study the data, rather than just regurgiating left-wing talking points.

Jim said...

Person with no name and no brain says u left out top 1%...guess he/she completely over looked the chart to see that every ones taxes go up. The less u make the higher the % increase. Why do people care what the top 1% or 1/10 of 1% pay? We all pay to much in taxes already. This wicked government spends to much. Flat tax for all I say. 5% for those making $1 to $50,000, 10% for those making $50,001 to $200,000 and 15% for those makiing above $200k. No loop holes, no deductions, just a one page 1040ex form for all for income tax only. No death tax, business tax, corperate taxes, or obamacare taxes.


do away with income tax and just have a national sales tax. The more u make the more u send hence the more tax u pay.

Socialist cry babies need to stop worrying about what other people make and that they should pay so much more. To penalize people for doing good is wrong.