Liberty on Tap since 1984
In just three months, on January 1, 2011, the largest tax hikes in the history of America will take effect.
They will hit families and small businesses in Three Great Waves. I normally like to provide "short and to the point" information, but the topic of Increasing Tax Rates requires some more detailed information.
On January 1, 2011, here is what will happen:
Expiration of 2001 and 2003 Tax Relief:
1. In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011.
Personal Income Tax Rates will Rise:
1. The top income tax rate will rise from 35% to 39.6% (this is the rate at which two-thirds of small business profits are taxed).
2. The lowest rate will rise from 10% to 15%. All the rates in between will also rise.
3. Itemized Deductions and Personal Exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates.
The full list of marginal rate hikes is listed below:
1. The 10% bracket increases to an expanded 15%
2. The 25% bracket increases to 28%
3. The 28% bracket increases to 31%
4. The 33% bracket increases to 36%
5. The 35% bracket increases to 39.6%
Higher taxes on marriage and family:
1. The "marriage penalty" (narrower tax brackets for married couples) will return from the first dollar of income.
2. The child tax credit will be cut in half from $1,000 to $500 per child.
3. The standard deduction will no longer be doubled for married couples relative to the single level.
4. The dependent care and adoption tax credits will be eliminated.
The return of the Death Tax:
1. This year only, there is no death tax. (However, it is a scam!) For those dying on or after January 1, 2011, there is a 55% Top death tax rate on estates over $1 million.
2. 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 fortune.
3. Their children will have to sell the farm, which may be their livelihood, just to pay the estate tax if they
do not 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 does not 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, or cash worth $500,000 on top of the $1 million business, then you will owe the government $275,000 cash!
4. That is 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?
Higher tax rates on savers and investors:
1. The capital gains tax will rise from 15% this year to 20% in 2011.
2. The dividends tax will rise from 15% this year to 39.6% in 2011.
3. These rates will increase another 3.8% in 2013.
There are over twenty new or higher taxes in Obamacare. Several will go into effect on January 1, 2011. They include the following:
1. 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).
2. 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.
3. 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%, disadvantaging them
relative to IRAs and other tax-advantaged accounts, which remain at 10%.
1. The Alternative Minimum Tax (AMT) and Employer Tax Hikes - When Americans prepare to file their tax returns in January of 2011, they will be in for an unwelcome surprise - the AMT will not be held harmless, and
many tax relief provisions will have expired. The major items include:
a. The AMT will ensnare over 28 million families, up from 4 million last year.
b. 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.
c. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to deal with a only a small portion of taxpayers.
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 others. Combining high marginal tax rates with the
loss of this tax relief will cost jobs.
Tax Benefits for Education and Teaching Reduced:
1. The deduction for tuition and fees will not be available.
2. Tax credits for education will be limited.
3. Teachers will no longer be able to deduct classroom expenses.
4. Coverdell Education Savings Accounts will be cut.
5. Employer-provided educational assistance is curtailed.
6. 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.
I know this is a lengthy document to digest, but this is what we face if Congress does NOT act to extend the tax cuts that are set to expire on December 31, 2010.