Expiration Of The Bush Tax Cuts
Death and taxes
Death and taxes. According to Benjamin Franklin, these are the only two things in life that are certain. Currently though, the big question is not will we pay taxes, but rather, how much tax will we pay?
If the Bush tax cuts are allowed to expire at the end of the year, millions of families will be faced with thousands of dollars in tax increases according to estimates from the nonpartisan Joint Committee on Taxation. Obviously, there is no way we could possibly cover every detail of the tax code within one communication, but we will do our best to cover the most significant areas.
Income Tax Rates
If Washington does not act, income tax rates will rise for almost every bracket, with the bottom rate going from 10% to 15%, and the top rate going from 35% to 39.6%. This means that if you currently earn $40,000 a year, you could end up owing $400 more in additional taxes for the year.
If you have children or grandchildren, you should know the planned lowering of the child tax credit from $1,000 to $500 per child would cost 31 million families an average of $1,033 in 2011. In addition, the reinstatement of the so-called marriage penalty a peculiarity in the tax code that forces some married couples to pay more for income tax than they would if they were single would cost 35 million couples an average of $595 each, according to the preliminary numbers.
i:What about the wealthy?
How are changes in the income tax rates likely to affect them? Notice the following table:
Interestingly, a March poll by Quinnipiac University in New York found 60% of Americans support raising taxes on those earning more than $250,000, if the money is used to reduce the deficit. According to the Treasury Department, this tax increase on upper-level income earners would yield about $41 billion next year and $969 billion over the next decade. The White House says that would help reduce the $1.5 trillion budget deficit. Will it be used that way? Who knows? One thing is certain: How raising taxes will affect the economy is being heavily debated. Many analysts are afraid that letting taxes rise would curtail job growth and send stocks tumbling.
ii:Capital Gains and Dividend Tax Rates
As you can see from the chart below, both capital gains and dividend tax rates are scheduled to increase beginning in 2011.
Because of JGTRRA (Jobs and Growth Tax Relief Reconciliation Act of 2003), the tax rates on long-term capital gains are generally lower. The maximum tax rate on long-term capital gains (defined as gains on assets held for more than one year) was lowered from 20% to 15% through December 31, 2008. (For taxpayers in the 10% and 15% tax brackets, long-term capital gains are taxed at 5% through December 31, 2007 and 0% in 2008-2010). TIPRA (Tax Increase Prevention and Reconciliation Act of 2005) extended the 15% tax rate through December 31, 2010, but because this provision sunsets December 31, tax rates will revert to 2002 rates in 2011 unless the cuts are extended or made permanent.
Regarding how dividend income is taxed, JGTRRA provided for lower tax rates on dividends that meet the definition of qualified dividends. TIPRA extended the 15% and 0% tax rates through December 31, 2010. Because this provision sunsets December 31, 2010, tax rates will revert to 2002 rates in 2011 unless the rate cuts are extended or made permanent, and dividend income will be taxed as ordinary income at your highest marginal tax rate. This means, if your ordinary income is taxed at say, 30%, your effective tax rate on dividend income could double.
iii:Estate Tax
The roots of estate tax troubles date back to 2001, when Congress voted to gradually raise the estate tax exemption while cutting income tax rates. The phase-out ended in repeal of the tax in 2010. But like all the other Bush administration tax cuts, the reduction in the estate tax is scheduled to expire at the end of this year. Notice how this will affect estate tax rates.
Yes, the federal estate tax is scheduled to return with a vengeance on Jan. 1, 2011, imposing a levy of up to 55% on estates valued at more than $1 million. It doesnt take much to add up to a million dollar estate. Just a home, an IRA or 401(k) retirement account, and some other savings, and you get to $1 million pretty quickly.iv
If there's ever a good time to die, it looks like 2010 is it.
Summary
So at this point, what is likely to happen with the current tax cuts? Here are 3 potential scenarios:
Option 1: Congress gridlocks once again, failing to extend any of the Bush tax cuts, which means well wake up on January 1, 2011 with all rates roughly 3 percentage points higher, and dividends taxed as ordinary income, with the top rate at 39.6%. This could be an extremely negative scenario for the markets, and might generate fears that the economy once again could plunge into recession. Its unthinkable that Congress would be that irresponsible, but with Congress nothing is out of the question.
Option 2: Congress could throw up their hands, unable to make the fixes President Obama wants, and decide a week before Christmas to extend the Bush tax cuts for another year. Many conservatives, ranging from Harvards Marty Feldstein to CNBCs Larry Kudlow, argue that with the economy still fragile, its not a good idea to raise taxes on anyone.
Option 3: The most likely but far from certain scenario is that President Obama gets what he wants: Congress will extend the tax cuts for individuals earning less than $200,000 and families that make less than $250,000. The President promised to do this during the election, and if he breaks that promise, as George H.W. Bush did, he could become a one-term president, as Bush was.
Under this latter scenario, taxes on the rich, would rise, with the top rate going from 35% now to 39.6%; the capital gains rate would increase from 15% now to 20%, and the dividend rate probably would rise to 20% also.v
Why did we send you this communication?.
One of the primary ways we help our clients is by working hard to provide tax-smart investment strategies to minimize the impact Uncle Sam can have. In addition, we consider it our responsibility to educate you about things that could affect your financial future. As your dedicated advisors, it is our goal to provide you with:
1) Sound money management
2) Meaningful education
3) Exceptional service
Please be assured of our ongoing commitment to support you in these and other ways. If there is ever anything additional we can do to assist you, please dont hesitate to call us. It is an honor and a privilege to serve you!
by: srp
The Runescape Prayer Guide To Get 99 Prayer I Khajuraho Honor To A Wealthy Heritage Send Flowers To Abu Dhabi Four Steps To Take Care Of Your Prom Dresses Pros Of A 4 Bhk In Pune Finding A Functional Resume Template For Free Resume Examples Using A Resume Layout Option Through A Resume Builder Program Finding A Free Resume Maker Or Basic Resume Template Program Khajuraho Respect To A Rich Heritage Why The Led Lamp Is Not Unpopular In North America Raymond Mill Is Meaningful For Brittle Minerals Benefits Of Using Draw Something Cheat Artificial Sand Production Line Controls Fineness Modulus