Many taxpayers are looking forward to Janaury 1, 2011, hoping a new Congress will put the country back on track. But unless something is done soon, the new year will also come with many tax hikes…including a return of the death tax, according to the American for Tax Reform.
Through the end of this year, the federal estate tax rate is zero, thanks to the package of broad-based tax cuts that the former Congress pushed through to get the economy going. But as midnight December 31, 2010, the death tax returns at a rate of 55% on estates of $1 million or more; and then there are State taxes. The effect this will have on hospital life-support systems is already a matter of conjecture.
Resurrection of the death tax, however, is not the only tax problem that will be ushered in January 1. Many other cuts from the prior administration are set to disappear and a new set of taxes will appear. And if your're rich, according to some government bureaucrat, you will pay.
The lowest bracket for the personal income tax moves up 50% to 15%; the next lowest bracket, will rise to 28%; and the old 28% bracket will be 31%. At the higher end, the bracket becomes 39.6%.
But the damage doesn't stop there. The marriage penalty also makes a comeback, and the capital gain tax goes to 20%. The tax on dividends will go all the way to 39.6%, which is a 164% increase. Both the capital gain and dividend taxes will go up further in 2013, because the
health-care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year; and joint filers making more than $250,000. Other tax hikes include reducing the child tax credit by $500; and fixing the standard deduction for couples at the same level as it is for single filers.
Letting the tax cuts expire will cost taxpayers $115 billion next year alone, according to the Congressional Budget Office, and $2.6 trillion through 2020. But even more tax headaches lie ahead. The "second wave" of tax hikes, are designed to pay for the health-care law and include:
The Medicine Cabinet Tax. Americans for Tax Reform says taxpayers will no longer be able to use health saving account, flexible spend accounts , or health reimbursement pre-tax dollars to purchase non-prescription, over-the-counter medicines. except insulin.
The Health Savings Account Withdrawal Tax Hike. This provision of Obama-Care provides for an additional tax, on non-medical, early withdrawal from an HSA of 20%. This 20% penalty will disadvantage the taxpayer worst than an early IRA withdrawal and other tax-advantaged accounts, which remain at 10%.
Brand Name Drug Tax. Makers and importers of brand-name drugs will be liable for a tax of $2.5 billion in 2011. The tax goes to $3 billion a year from 2012 to 2016, then $3.5 billion in 2017 and $4.2 billion in 2018. Beginning in 2019 the tax falls to $2.8 billion and stays there. And who pays the new drug tax? Patients.
Economic Substance Doctrine. Americans for Tax Reform reports that "The IRS is now empowered to disallow perfectly legal tax deductions because the IRS judges the deduction or tax-plan lacks 'economic substance’.
A third wave, of taxes consists of (1) widening the Alternative Minimum Tax (AMT) (2) tax hikes on employers and (3) the loss of deductions for tuition.
The Tax Policy Center, says that the failure to index the AMT will subject 28.5 million families to the tax when they file the 2011 tax return.
Small business normal expense equipment purchases up to $250,000. This will be cut to $25,000. Currently larger businesses can expense up to half of their purchases of equipment. In January of 2011, however, all equipment purchases will have to be depreciated.
There are literally scores of tax hikes on business that will take place plus the loss of some tax credits. The research and experimentation tax credit will be the biggest loss; but there are many other as well. Here are a few of the lost credits:
The deduction for tuition and fees will no longer be available and there will be limits placed on education tax credits. Teachers will not be able to deduct their classroom expenses and employer provided educational aid will be restricted. Thousands of families will no longer be allowed to deduct student loan interest.
Then, there is the tax on those who decline to buy health insurance, plus a 3.8% Medicare tax, beginning in 2013, on profits made in real estate transactions by wealthier Americans.
This intellectual capital is offered as an education service to our clients and friends. The information is of general nature and should not be acted upon without further details and professional guidance. So if you know someone that is looking for a way to save taxes and remain invisible to the IRS, think of us. With us there are No conditions, No exceptions, No time limits, No IRS.
