The Largest Tax Increase in American History is Only Six Months Away

In observing some of the more insightful comments about my recent post regarding our nation slipping into a full-fledged economic depression, it occurred to me that some folks may be incognizant of the magnitude of the looming tax increases set to hit us in a mere six months.

The tax increases (primarily the expiration of the Bush tax cuts) set to hit the American people on January 1, 2011 have received scant media coverage, but their cumulative effect upon the American people will be truly massive. Never in American history has such a significant portion of existing tax code changed all at once as the tax laws enacted in 2001 and 2003 under President Bush and Republican Congress are allowed to expire. Unlike most previous increases, these sweeping changes will dramatically impact all taxpayers, not just the wealthy.

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Many citizens may be surprised to learn that taxpayers in the lowest bracket will experience a significant increase in their federal income tax as our current six tax brackets are replaced by five higher ones:

Taxpayers currently in the 10% bracket will pay 15%
Taxpayers currently in the 15% bracket will pay 15%
Taxpayers currently in the 25% bracket will pay 28%
Taxpayers currently in the 28% bracket will pay 31%
Taxpayers currently in the 33% bracket will pay 36%
Taxpayers currently in the 35% bracket will pay 39.6%

The marriage tax penalty returns in six months. Currently, the standard deduction for married couples filing jointly is double that of those filing singly. However, in six months, married couples lose one-third of the standard deduction for either the husband or wife as the joint deduction is reduced to 167% of the total of two non-married single taxpayers. This represents a decrease of $1900 in the standard deduction married couples can claim. That translates to several hundred dollars in additional federal income tax.

Large families of all classes will be hit particularly hard next year as the standard deduction for children will be slashed in half to only $500 per child. Thus, a family of four children will lose $2000 of tax credits they enjoyed under the existing law. Families caring for other dependents will see their tax credits reduced from $3000 to $2400.

These increases, in of themselves are quite astonishing. While the poorest Americans who pay little income tax may not be affected, the vast majority of the working class will be shocked to learn that no refund checks are forthcoming because the marriage penalty has been reinstituted and the child credits have been slashed. Again, a married couple with four children loses around $2300 in tax credits. A typical family with only two children and earning $50,000 to $80,000 would see their total annual federal income tax triple to around $2800 with these increases alone. I’m not getting a sense that many people are aware of this.

The new tax laws will also adversely affect property owners and investors. Today the top federal tax on long-term capital gains and dividends is at 15%. However, in January the maximum tax on long-term capital gains rises to 20% and the top rate on dividends surges to an investment-crippling 39.6%.

Wealthier citizens will see the reimplementation of phase-out rules for itemized deductions and personal exemptions At present, itemized deductions for everything from business expenses to mortgage interest are allowed. However, wealthier taxpayers (over $200,000 annual income) will see these deductions phased out to the tune of 80% in some cases.

The estate tax employing the “stepped up” basis will return with a 55% maximum rate
(including surtax) and a $1 million exemption. Currently the estate tax is zero. If you are very wealthy and intend on leaving money for your grandchildren, you may want to give it to them now because under the new estate tax law, the federal government will seize 82% of your estate when it is left for grandchildren.

Business owners may be the hardest hit from the sweeping changes next January. Payroll taxes are set to increase as much as 10%. Presently, small businesses can expense out equipment purchases up to #250,000. This will be slashed all the way down to $25,000. Larger businesses can expense only half of their equipment purchases. This will undoubtedly suppress expansions and hiring.

The list of increased taxes upon the American people goes on and on. The credits for homeowners who purchase energy efficient appliances will disappear. The American Opportunity Tax Credit expires. The tax credits to hire unemployed veterans will end. The tax credits to hire disadvantaged youth are gone. The Work Opportunity Tax Credit which allows employers to credit up to 40% of the first-year wages of a new employee will expire.

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”, a provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 while currently there is no federal government limit. One group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children.

All these increases in our federal income tax will come at a time when many state and local taxes will be on the rise as well. As the liberals in power plow forward for even more massive revenue enhancements such as the Value Added Tax, it seems Mr. Obama may encounter some difficulty in reconciling his campaign pledges of tax decreases for everyone earning less than $250,000.

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