Pending Taxastrophe

Notwithstanding the chance that anything can change between now and January 1, we are facing a devastating barrage of tax increases next year. We face the expiration of the 2001 and 2003 tax cuts, the alternative minimum tax (AMT) patch, numerous tax extenders and various economic stimulus programs. If our elected officials do nothing between now and the end of the year, which is unfortunately quite likely, this taxastrophe could send our already weak economy right back into recession. Here are just a few of the problem areas:

  1. The five income tax brackets will move from 10% through 35% to 15% through 39.6%.
  2. The child tax credit will be lowered from $1,000 per child to $500.
  3. Education credits: Hope scholarship credits will be reduced or phased out. Contribution limits to the Education IRA will be reduced. Income levels for the phaseout of student loan interest deductions will be cut in half.
  4. High income taxpayers will see the return of the phaseout of certain itemized deductions.
  5. High income taxpayers will also be subject to the personal exemption phaseout.
  6. Thanks to dramatically reduced exemptions, tens of millions of additional taxpayers could be subject to the AMT.
  7. The estate tax will revert from $5.12 million with a top rate of 35% to $1 million with a top rate of 55%.
  8. The capital gains tax will rise from 15% to 20%. All dividends will rise to marginal tax rates from 15%. In addition, taxpayers with an AGI over $250,000 will be subject to an additional 3.8% tax on all investment income.
  9. Flexible Spending Accounts (FSA) will be less flexible and less helpful.
  10. Various tax extenders and economic stimulus programs will all expire.

What does all this mean to you and me? According to the nonpartisan Tax Foundation, a family of four with parents earning $75,000 each would pay $4,500 more in taxes and see their payroll tax increase by $3,000. To check out your own situation, you can visit http://interactive.taxfoundation.org/taxcalc.

It’s impossible to sugarcoat how bad this is. If nothing is done, our government will be vacuuming ever more money out of our pockets. That in turn will mean less we have to spend on other goods and services, which will mean our economy will likely contract into a recession.

Thanks to Phillips Hinch, August 2012 edition of the Journal of Financial Planning.

2 thoughts on “Pending Taxastrophe

    • Andy, there are, unfortunately, no easy answers. Ideally, we’d be able to shrink the number of tax brackets from five to two or three, and reduce the top bracket. I’d make permanent a low capital gains and dividend tax rate because corporations are already paying taxes on their profits, which are then paid to us in dividends. The AMT should be fixed to a much higher threshold of income, and indexed for inflation. Many of the other credits and stimulus programs I don’t really mind going away because they were one-time events to begin with. But if we do all of this, the government must find corresponding cuts in spending so we don’t further increase the deficit. That’s the problem. We can’t do anything to increase the deficit. Big picture, I’d like to see the overall size of the government shrink; let me keep more of my money and spend it as I see fit, rather than the government take it and spend it as they see fit.

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