Wednesday, July 28, 2010

Largest Tax Increase in US History on the Horizon

In 6 months, America faces the largest tax increase in US history.  The tax cuts passed in 2001 and 2003 (popularly called the "Bush Tax Cuts") are set to expire on January 1, 2011.  Congress and the Obama administration must act in the next few months to prevent this enormous tax increase from causing millions of people, including the President's defined "working families" to pay more to the federal government.  

The President promised on multiple occasions not to raise taxes on families making under $250,000/year, calling those Americans "working families".  The President and many in Congress allege that the massive increase will only impact the wealthy, however; with the return of the marriage penalty, the child tax credit cut in half, and all personal income tax rates rising, the expiration of the "Bush Tax Cuts" will result in an across the board tax hike for everyone.  Special tax provisions to help students, adoptive parents, business owners and teachers will expire requiring these groups to pay more in taxes irrespective of income level.  

  • All personal income tax rates rising;
    • 10% rising to 15%
    • 25% rises to 28%
    • 28% rises to 31%
    • 33% rises to 36%
    • 35% rises to 39.6% (rate at which 2/3 of small business profits are taxed)
  • Child Tax Credit cut in half;
  • Return of the Marriage penalty (narrower tax brackets on married persons);
  • Cut in Dependent Care Credit;
  • Cut in Adoption Assistance Credit;
  • Return of the 55% Death Tax on individuals and small business owners;
  • Increase in Capital Gains Tax from 15% to 20%;
  • Increase in Dividend Tax from 15% to 39.6%;
  • Cut in Student Loan Interest Deduction;
  • Cut of 75% to the Maximum Annual Contribution allowed to Education IRA;
  • Loss of Itemized Deductions up to 80%;
  • Return of the AMT will directly affect over 28 Million families in 2011;
  • Cut in depreciation for small businesses, from $250,000 to $25,000;
  • Cut of 50% of expensing for larger businesses;
  • Loss of deduction for tuition and fees;
  • Limitation for education based tax credits;
  • Loss of deduction of classroom expenses for teachers;
  • Charitable contributions from IRAs no longer allowed; 
The above is only a partial list of what average Americans have to look forward to in January 2011.  A list of over 65 tax increases has been compiled by the Congressional Joint Committee on Tax Provisions.  The expiration of the Bush Tax Cuts will increase taxes on all families, not just on the "wealthy".   

  • The Tanning Tax - 10% tax currently in effect;
  • The "Medicine Cabinet Tax" - disallows pre-tax dollars in the form of health savings accounts, flexible spending accounts or health reimbursement accounts to purchase non-prescription, over the counter medicines (except insulin);
  • The HSA Withdrawal Tax  - increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20%;
  • Brand Name Drug Tax - multi-billion dollar excise tax on name brand drug manufacturers who are raising their prices to pay the tax;
  • Economic Substance Doctrine - arbitrary empowerment of IRS agents to disallow legal tax deductions  due to lack of "economic substance".
These tax increases in the healthcare bill, along with the health insurance purchase mandate, are not waived for families making under $250,000.  

Congress and the Obama Administration are not committed to continuing any of the above tax cuts or repealing the tax increases included in the healthcare bill.  This is some talk from the administration about keeping the personal income tax rates lower for those "working families" but letting everything else expire because they predict only the wealthy will be affected.  Treasury Secretary Geithner recently  announced they will allow the capital gains tax increase to 20% and the child tax credit to be cut in half.  The administration has also come out strongly supporting raising taxes on top of the expiration of the "Bush Tax Cuts" on those making over $250,000, the "wealthy", to support their massive increase in spending.

While the administration attempts to pit the "working families" against their defined "wealthy" to pay for  Congress and the administration's monumental increase in deficit spending, those of us on the ground understand what is really at stake.  In a tough economic time, do we really want more money taken out of our paychecks for politicians to spend as they see fit in Washington? What will happen to those friends employed by small businesses whose taxes are substantially raised?  Ultimately, do we believe in politicians taking more money from us, from our retirement accounts, from our deceased loved ones, and from our employers to continue to grow government?

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