Big tax changes in the works

Wednesday, August 11, 2010

Tax hikes -- unless there is legislative action: I thought you would want to see this.

In just six months, the largest tax hikes in the history of America will take effect. They will hit families and small businesses in three great waves on Jan. 1, 2011:

First wave: Expiration of 2001 and 2003 tax relief.

In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners and families. These will all expire on Jan. 1.

Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exceptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:

* The 10 percent bracket rises to an expanded 15 percent.

* The 25 percent bracket rises to 28 percent.

* The 28 percent bracket rises to 31 percent.

* The 33 percent bracket rises to 36 percent.

* the 35 percent bracket rises to 39.6 percent.

Higher taxes on marriage and family. The "marriage penalty" (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1,000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level.

The dependent care and adoption tax credits will be cut.

The return of the death tax. This year, there is no death tax. For those dying on or after Jan. 1, 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to his or her loved ones.

Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013.

Second wave: Obamacare.

There are over 20 new or higher taxes in Obamacare.

Several will first go into effect on Jan. 1, 2011. They include:

The "Medicine Cabinet Tax." Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA) or health reimbursement (HRA) pretax dollars to purchase nonprescription, over-the-counter medicines (except insulin).

The "Special Needs Kids Tax." This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2,500 (Currently, there is no federal government limit). There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special-needs children. There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special-needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C., (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education.

The HSA withdrawal tax hike. This provision of Obamacare increased the additional tax on nonmedical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

Third wave: The alternative minimum tax and employer tax hikes:

When Americans prepare to file their tax returns in January 2011, they'll be in for a nasty surprise: the AMT won't be held harmless, and many tax relief provisions will have expired. The major items include:

The AMT will ensnare over 28 million families, up from 4.3 million last year. According to the left-leaning Tax Policy Center, Congress' failure to index the AMT will lead to an explosion of AMT taxpaying families -- rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers.

Small business expensing will be slashed and 50 percent expensing will disappear. Small businesses can normally expense (rather than slowly deduct or "depreciate") equipment purchases up to $250,000. This will be cut all the down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be "depreciated."

Taxes will be raised on all types of businesses. There are literally scores of tax hikes on business that will take place. The biggest is the loss of the research and experimentation tax credit, but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.

Tax benefits for education and teaching will be reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.

Charitable contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual "required minimum distribution." This ability will no longer be there.

Now your insurance is income on your W-2s.

One of the surprises we'll find come next year, is what follows -- a little "surprise" that 99 percent of us had no idea was included in the "new and improved" health care legislation. The dupes, er, dopes, who backed this administration will be astonished.

Starting in 2011, (next year, folks), your W-2 tax form sent by your employer will be increased to show the value of whatever health insurance you are given by the company. It does not matter if that's a private concern or governmental body of some sort. If you're retired? So what? Your gross will go up by the amount of insurance you get.

You will be required to pay taxes on a large sum of money that you have never seen. Take your tax form you just finished and see what $15,000 or $20,000 additional gross does to your tax debt. That's what you'll pay next year. For many, it also puts you into a new higher bracket, so it's even worse.

This is how the government is going to buy insurance for the 15 percent that don't have insurance and it's only part of the tax increases.

Not believing this? Here is a research of the summaries:

On page 25 of 29: Title IX Revenue Provisions-Subtitle A: Revenue Offset Provisions -- (sec. 9001, as modified by sec. 10901) Sec. 9002 "requires employers to include in the W-2 form of each employee the aggregate cost of applicable employer sponsored group health coverage that is excludable from the employees gross in income."

Joan Pryde is the senior tax editor for the Kiplinger Letters. Go to Kiplingers and read about 13 tax changes that could affect you. No. 3 is what is above.

People have the right to know the truth because an election is coming in November.

A different view of the immigration problem. The owner of the Phoenix Suns basketball team, Robert Sarver, opposes Arizona's new immigration laws. Arizona Gov. Jan Brewer released the follow statement in response to Sarver's criticism of the new law:

"What if the owners of the Suns discovered that hordes of people were sneaking into games without paying?

"What if they had a good idea who the gate-crashers are, but the ushers and security personnel were not allowed to ask these folks to produce their ticket stubs, thus non-paying attendees couldn't be ejected. Furthermore, what if Suns' ownership was expected to provide those who sneaked in with complimentary eats and drink? And what if, on those days when a gate-crasher became ill or injured, the Suns had to provide free medical care and shelter?"

What has America become? Has America become the land of the special interest and home of the double standard?

Let's see: If we lie to Congress, it's a felony, and if Congress lies to us it's just politics. ... The government spends millions to rehabilitate criminals but does almost nothing for the victims. In public schools you can teach that homosexuality is OK, but you better not use the word "God" in the process. You can kill an unborn child, but it's wrong to execute a mass murderer. We don't burn books in America; we rewrite them. We got rid of the communist and socialist threat by renaming them progressives. We are unable to close our border with Mexico but have no problem protecting the 38th parallel in Korea. If you protest against President Obama's policies, you're a terrorist, but if you burned an American flag or George Bush in effigy it was your First Amendment right.

You can have pornography on TV or the Internet, but you better not put a Nativity scene in a public park during Christmas. We have eliminated all criminals in America; they are now called sick people. We can use a human fetus for medical research, but it's wrong to use an animal.

We take money from those who work hard for it and give it to those who don't want to work. We all support the Constitution, but only when it supports our ideology. We still have freedom of speech, but only if we are being politically correct. Parenting has been replaced with Ritalin and video games. The land of opportunity is not the land of handouts. The similarity between Hurricane Katrina and the Gulf oil spill is that neither president did anything to help.

And how do we handle a major crisis today? The government appoints a committee to determine who's at fault, then threatens them, passes a law, raises our taxes and tells us the problem is solved so they can get back to their re-election campaign.

What has happened to the land of the free and home of the brave?

-- Ken Huber, Tawas City

(sent to me by a friend)

Gary Rust is chairman of Rust Communications.

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