[Update: Dec 7th 2010, President Obama and Congress have reached a tentative deal to temporarily extend the Bush tax cuts for all Americans, including the wealthiest. This deal not only extends the tax cuts from the Bush era but also adds some concessions made by President Obama. To read about the recent tax cut deal package, click here - What does the tax cut deal mean to me?. If you want to read about the bush era tax cuts in detail continue reading this post]
An epic battle is brewing in the Capitol over what should be done about the expiring Bush tax cuts. It could be a major factor in shaping the upcoming fall elections. President Obama vowed to never raise taxes for the middle class (Single people earning <$200,000 and Couples earning <$250,000). I believe Mr. President has kept his word and intends to let the tax cuts expire only for the wealthy (Couples earning >$250,000 and Single people earning more than $200,000). All that is good and dandy but its not in his hands alone. He needs Congress’ bipartisan support to do anything. If there is no action, rich and poor, all of us are looking at a higher tax bill than last year. So how will I be affected?
Lets look at all the so-called Bush Tax Cuts and where Mr. President stands.
What changed in 2001 & 2003?
Where President Obama Stands?
|Income Tax Brackets
Reduced income tax brackets
|Allow the tax cuts to expire only for couples earning more than $250,000 and individuals earning more than $200,000 – about 2% of the American households. The top two income tax rates would revert to 36% and 39.6%.|
|Personal exemptions and itemized deduction
Eased limits on personal exemptions and itemized deductions like mortgage interest and charitable donations for high earners and eliminated entirely by 2010
|Phase out personal exemptions and reduce itemized deductions. For the rich (the top two tax brackets) cap itemized deductions at 28%. Under existing law, the tax rises with a taxpayer’s bracket.|
|Child tax credit
Increased standard deduction for married people filing joint returns.
|Dividends and capital gains
Lowered the top rate to 15% on taxes paid by stockholders on corporate dividends
|Restore the 20% rate on capital gains. Taxpayers in the top two brackets would also pay 20% on dividends.|
|Estate tax on inherited wealth
||Restore the 2009 levels, imposing a 45% on inheritances of more than $3.5 million for individuals and $7 million for couples.|
|Alternate Minimum Tax
Increased the amount of income subject to the tax, which was intended to prevent affluent people from using deductions to avoid paying taxes. But the AMT rapidly expanded its reach into the middle class because it is not adjusted for inflation.
|Adjust the AMT for inflation. In recent years, congress has passed temporary fixes every year to keep the fax from hitting the middle class.|
So how will I be affected if nothing is done to extend the cuts?
- Tax Brackets : Mine is definitely going up. EVERYONE’s tax bill is going to go up. The additional tax levied on income earned over $16751 and less than $68000 remains at 15%. In fact the lowest income range will see the most increase with 5%. Example – Person A earns $16,750 and Person B earns $68,000. Person A’s tax bill will go up by $837.5 (5% increase of $16,750) and he will pay $2512.5 total. Person B’s tax bill will be $2512.5 (15% of 16,750) + $7687.5 (15% of $51250) totaling $10200. So Person B’s tax bill also goes up only by $837.5. Which means Person A’s increase would be 5% , person B’s increase would be 1.2% , if I am earning $137,300 my increase would be 1.5% and so on.
- Personal exemptions and itemized deduction: I am not sure how this will affect me personally, but from rough calculations, I don’t think I will be affected by the phase outs of personal exemptions (it is for people earning >$250,000. If this is wrong please let me know).
- Child tax credit : We don’t have kids so we don’t claim this, but it looks like the rich are not the ones who are “looking” for this credit, so if this provision is allowed to expire, it will hit the poor the most.
- Standard Deduction : This won’t personally affect us again because we always take the itemized deduction, but most people in my category (married with no mortgage) will be hit by this hard. This basically brings back the “Marriage penalty”. This change made the married standard deduction double the amount of single standard deduction (that seems fair to me). If this expires the married standard deduction will only 167% of the single standard deduction. This will hit the middle class, dual income folks, rich or not.
- Dividends and capital gains : Even if some action is taken, looks like this is going to increase. And it is not just the rich who have dividends and capital gains. They might get most of their income from it, but the middle class has them too. So I will be paying more in this category.
- Estate tax on inherited wealth : This is really out of my realm. I know it won’t affect me but I am not sure how it will affect others or who it will affect. If you do know please leave a comment.
- Alternate Minimum Tax : This should really be adjusted for inflation. Otherwise as time goes on more and more of the middle class is going to be paying this AMT.
Other credits/Cuts expiring too
There are other credits that are expiring this year too… but those are not the talk of the town because we already know they are only a temporary credit.
- Deductible Premiums for Mortgage Insurance
- Enhance Health Insurance Credit for Certain Individuals
- Exclusion of Benefits to Volunteer Firefighters and EMRs
- Include Computer Equipment as a Higher Education Expense
- Increase Earned Income Tax Credit
- Making Work Pay Credit
- Work Opportunity Tax Credit for Youths and Veterans
- American Opportunity Tax Credit
Whether we like it or not, looks like we are going to be paying more taxes in 2011. Do you think Congress should extend the cuts? For everyone? Not for the wealthy? Will you be personally affected by any of these?