Tax cuts passed by a Republican controlled Congress during the Bush Administration expire January 1, 2011. Currently, no plans for renewing them have been announced by the Obama Administration, and the Democratic controlled Congress is balking at Republican requests to extend them. Obama campaigned on the promise of no tax increases for Americans making less than $250,000 per year. Unfortunately for him, if the
Bush tax cuts are not extended, it will result in the largest tax increase in American history and will affect nearly
ALL American taxpayers.
I received the information below explaining what the expiration of the Bush tax cuts includes from a friend of mine several days ago. My wife, the CPA, verified it as true.The"expiration" will hit us in three waves.
THE FIRST WAVE:
Expiration on January 1, 2011 of 2001 and 2003 Tax Relief which included several tax cuts for investors, small business owners, and families. Personal income tax rates will rise as the top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed), and the lowest rate will rise from 10 to 15 percent. The rates in between will rise as follows :
- The 10% bracket rises to an expanded 15%.
- The 25% bracket rises to 28%.
- The 28% bracket rises to 31%.
- The 33% bracket rises to 36%.
- The 35% bracket rises to 39.6%.
Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher
marginal tax rates. The "marriage penalty" (narrower tax brackets for married couples) will return from the first dollar of income, and the standard deduction will no longer be doubled for married couples relative to the single level. In addition, the child tax credit will be cut in half from $1000 to $500 per child, and the dependent care and adoption tax credits will be cut.
The
Death Tax returns after 2010. For this year only, there is no death tax, but for those dying on or after January 1, 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes, a business, a retirement account, could easily pass along a death tax bill to their loved ones. Think of the farmers who don't make much money, but their land, which they purchased years ago with after-tax dollars, is now worth a lot of money. Their children will have to sell the farm, which may be their livelihood, just to pay the estate tax if they don't have the cash sitting around to pay the tax. Think about your own family's assets. Maybe your family owns real estate, or a business that doesn't make much money, but the building and equipment are worth $1 million. Upon their death, you can inherit the $1 million business tax free, but if they own a home, stock, cash worth $500K on top of the $1 million business, then you will owe the government $275,000 cash! That's 55% of the value of the assets over $1 million! Do you have that kind of cash sitting around waiting to pay the estate tax?
Lastly in this first wave, there will be higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011, and the dividends tax will rise from 15 percent this year to 39.6 percent in 2011. Starting in 2013, these rates will rise another 3.8 percent.
THE SECOND WAVE:
There are over twenty new or higher taxes in
Obamacare. Several will first go into effect on January 1, 2011 and include:
- 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 $2500 (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 not be used to pay for this type of special needs education.
- The HSA (Health Savings Account) 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.
THE THIRD WAVE:
More Americans will be paying The
Alternative Minimum Tax (AMT), and there will be multiple 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 won't be held harmless, and many tax relief provisions will have expired. The major items include:
- 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 currently 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 will be reduced as follows :
- 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.
- Coverdell 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.
Furthermore, Charitable Contributions from IRAs will 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.
source : atr.org - Six Months to Go Unitl the Largest Tax Hikes in History
My background is in accounting and business. During one of the worst recessions in the country's history, the failure to extend these tax cuts will be the equivalent of pouring gasoline on a fire in regards to the current economy. In my opinion, in order to encourage small business to expand, grow, and hire workers, Obama and Congress
MUST at a
minimum extend the cuts to the Capital Gains Tax and continue to allow businesses to expense 50% of their equipment purchases if they want the economy to recover. Otherwise, an undue hardship will be placed on small businesses and investors will be discouraged from investing and providing the capital they need to grow. Furthermore, I believe the failure of Obama and Congress to extend the Bush tax cuts will actually result in extending the current recession.
Obama made a promise during the 2008 campaign that no one making under $250,000 a year would "pay an extra dime in taxes." It's easy to see that not extending the Bush tax cuts will increase the income tax burden of
nearly every single American making him out to be a liar. He's already mastered the "spend" in "tax and spend Democrat." Now, he's working on the "tax" part.
Therefore, the question you have to ask yourself is, "How's that Hope and Change working for ya now, America ??"