The big debate is on. At the end of this year, the Bush tax cuts are scheduled to expire. The Bush tax cuts represent legislation which was enacted in 2001 and 2003. This could have a far reaching negative impact on the already sluggish economy…not to mention the impact in our homes and our personal checkbooks.
There is quite a bit of chatter about extending (some of) these cuts and the debate is gathering strength. While much of the media attention has focused on the high income earners…this concern affects everyone who pays taxes. The final outcome could still be a hard pill to swallow for many.
What can you expect?
- Higher Income Taxes
- Marriage Penalty Returns
- Higher Capital Gains and Dividends
- Phase Out Rule for Itemized Deductions Returns
- Phase Out Rule for Personal Exemption Returns
Higher Tax Rates for all…
Yes, everyone will be subjected to higher tax rates. All you need to do is look at the tables below, for they tell the story. Rates will go up for all, not just the so-called “rich”. Currently we have six rate brackets, beginning at 10% and heading north to 35%. They will be replaced by five which start at 15% and top out at 39.6%.
Marriage Penalty returns
The Bush tax cuts eased the penalty to married individuals. The penalty caused married couples to pay more federal income tax than if they were single. While it still exists for some couples, it isn’t nearly as brutal as before the Bush tax cuts. Currently, the standard deduction for married folk (those filing a joint return) is double the amount for singles, which seems to make sense. Beginning in January 2011, the married-joint-filer will revert back to the pre-Bush era and amounts to about 167% of the singles tax bracket.
Here is the current tax structure:
Higher Capital Gains and Dividends
Currently the maximum federal rate on long term capital gains and dividends is 15%. Capital Gains means any profits on shares or other assets held for more than a year. Next year, capital gains tax will increase to 20%, and 18% for assets held more than five years. Dividends will be taxed at ordinary income tax rates – which means the maximum would be a fat 39.6%.
Itemized Deductions Phase Out
If you are a high income earner, you may recall that the phase out rule could eliminate up to 80% of your itemized deductions for mortgage interest, state and local taxes, and charitable deductions. Over time the rule eased and was finally eliminated. Look for it to return with a vengeance next year. It will affect you if your income is above an estimated $170K (or $85K if you are filing separate).
Personal Exemptions Phase Out
Personal exemption will get hit next year. If your adjusted gross income exceed about $252K (filing jointly), $168K (single), $210K (head of household), or $126K (married filing separate) your personal exemptions will phase out or be eliminated.
Obama says he wants to renew some tax cuts, while Republicans and some Democrats want to renew across the board. Unless the current spending spree is curtailed, taxes will have to go up at some point to pay for all the entitlement programs.
Should the current Bush tax cuts be allowed to expire, the relief they have offered will impact anyone who pays taxes. This could be a good time to visit your budget and begin tweaking in preparation for lower take home pay next year.