Jeff Schnepper: Biggest-ever tax hikes just ahead?

The Basics

Biggest-ever tax hikes just ahead?

The Bush tax cuts are due to expire at the year's end. But count on Congress to do something about taxes after the November election. Here's what's likely to happen.

By Jeff Schnepper
MSN Money

The stock market implosion fried your retirement nest egg, your house is now worth less than the mortgage securing it, you're holding on to your job by a slowly unraveling string, and now you're facing the biggest tax increases in the history of the U.S. Tax Code. No wonder more retirees are filing for bankruptcy.

Unless Congress acts soon, the Bush tax cuts created by the Economic Growth and Tax Reconciliation Act of 2001 will expire at the end of 2010. Here's what's at stake, what I expect to happen and how I suggest you plan for the changes:

Estate tax

A properly drafted will would have sheltered $7 million for a married couple from the Internal Revenue Service in 2009. We had an estate tax with a $3.5 million exclusion.

This year, there is no estate tax -- we have an unlimited exclusion. George Steinbrenner, the principal owner of the New York Yankees, picked the right time to die. His family saved a federal estate tax of more than $500 million.

But unless Congress acts, the estate tax will return Jan. 1 with an exclusion of only $1 million. Between a house, a retirement plan and any self-owned life insurance, the newly resurrected "death tax" will slam the upper middle class and suck bundles of dollars from their heirs.

Nobody wants an estate tax with only a $1 million exclusion. The Democrats are fighting for a $3.5 million exclusion with a top 45% rate; the Republicans demand a $5 million exclusion with a top 35% rate. They've been arguing this issue for more than two years now with no resolution.

Sen. Olympia Snowe, R-Maine, hit the nail on the head when she said: "It's all political theater. It's not about legislating anymore. It's all for the election coming very shortly."

After the November election, there should be a compromise. I expect the maximum rate to phase downward from 45% to 35%. I also predict an exclusion of $3.5 million for 2010 and 2011, phasing up to $5 million with a return to full step-up in basis. I suspect the law to be retroactive for 2010, but the estates of those dying before passage could follow the current zero-estate-tax rules.

Investment and income taxes

Here's where the issues become really dicey. Hefty increases in income taxes and marginal rates would turn normal tax planning on its head. Unless Congress acts, this is what will happen to tax brackets and capital gains:

  • The 10% bracket for low earners will disappear, and those dollars will be taxed at 15%.
    That's a 50% increase in tax on those dollars for everyone, including those least able to afford it.

  • The top marginal bracket will go from 35% to 39.6%. That's an increase of more than 13%.

  • The maximum marginal rate on long-term capital gains will go from 15% to 20%. That's an increase of 33%. The zero tax rate for those in the 15% bracket or lower will disappear.

  • The maximum rate on qualified dividends will jump from 15% to 39.6%. That's an increase of 164%.

Do you expect these increases to go into effect? Rather than accelerate deductions and defer income, you'd defer deductions until next year, when they will be worth more, and accelerate income into this year, so that it will be taxed at a lower rate.

Recognize capital gains now at a lower rate, even if you turn around and repurchase the same securities immediately. The wash-sale rules apply only to losses, not gains. From a tax perspective only, dump your dividend stock in exchange for appreciating securities. Trading dividend-yielding investments taxed at as much as 39.6% for investments producing capital gains with a top tax rate of 20% would be more than prudent, again purely on a tax basis.

Phaseouts by income

Congress is not known for its transparency. Rather than raising your taxes directly, it chooses to hide the increase by decreasing your deductions. As your income increases above certain floor levels, both your deduction for personal exemptions and the total of your itemized deductions are reduced. The expiring Bush tax cuts phased out these exemption/deduction slicers. They're scheduled to return Jan. 1.

This is nothing more than a 3% to 5% increase in your marginal tax. Again, if rates are going up and deductions going down, the new planning paradigm would be to accelerate income into 2010 rather than 2011.

Child credit

The child tax credit is now $1,000 for each dependent child under age 17.

That's a $1,000 reduction in your tax. Without congressional action, it may fall 50% to $500 for 2011.

Education savings accounts

Contributions to Coverdell Education Accounts (what used to be called Educational IRAs) are capped at $2,000 a year. If spent for appropriate educational purposes, the earnings on these accounts are tax-free. If the Bush cuts expire, the limit falls back to $500 per year.

If you invested $2,000 a year at 7% into a Coverdell Education Account for 18 years, you would have $38,758 in tax-free income and a total account valued at $74,758. At $500 a year, the tax-free income would drop to $9,690, with a total account value of $18,690.

Deductions that will be renewed -- again

This is where Congress really plays politics. That's from the Greek, "poly" meaning many and "ticks" meaning bloodsuckers.

We have a whole lot of tax provisions that are scheduled to expire but that are typically renewed each December. They include:

By waiting until the end of the year, Congress shamefully makes planning a "will they or won't they" game. It also causes costly IRS confusion and frustration. That's because it's hard to design and print tax forms for January distribution if the laws keep changing at the end of December.

Congress will renew the extenders. But, as many have pointed out, it's difficult to plan when you don't know the rules until the last month in the game, especially when those rules change each year. How can an employer make a decision to hire additional employees when the employer doesn't know what the cost will be (health reform, anybody?) or even what the tax implications will be?

If "con" is the opposite of "pro," is Congress the opposite of progress? Think about that when you go into the voting booth next week.

Published Oct. 28, 2010

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114Comments
10/31/2010 10:50 AM
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What a slanted article!

 

Re: "The 10% bracket for low earners will disappear, and those dollars will be taxed at 15%. That's a 50% increase in tax on those  dollars for everyone, including those least able to afford it. "

 

Why didn't you say how unfair it was that they only received a 33% tax decrease and now they are going to get a 50% increase?

 

That would make it sound even worse. You missed a big chance.

 

 

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When you talk about taxes it is always the little guy screwed. The first thing I see wrong with this statement is that upper middle class is now considered a millionaire. If you want to be fair, the bottom line is tax every dollar made by everyone and give everyone the same type of deductions. If we were to tax every dollar earned by every person working in the U.S. 10 percent - deductions that would be fair. Yes we need taxes to pay those that defend us and run our government. While we are on the subject how about making the vote on pay raises fair. Lets say congress votes a 2% pay raise for soldiers and government workers. Congress are government workers, why let them vote an exception for them? If its good enough for the rest of our government it should be good enough for them. To finish I would also like to suggest that for all those corporations who are leaving or left the U.S. for tax breaks lets charge them an extra embargo tax so that they help pay unemployment wages for the jobs they took away to cheap labor using the same retail. If your representatives aren't looking out for the best interest of the U.S. send a message in this election and fire him or her and tell the replacement that it can happen to them also. This is our country and our government lets let them know we want representatives that are concerned about our country and not their own personal business.
10/30/2010 2:07 PM
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Rational Liberty

 

Your general statements have some merit but problems cannot be resolved with generic statements. They can only be addressed by understanding the path (in detail) that has led to the current situation. In other words, they can only be addressed with specific plans and hard analysis.

 

It stands that the nations that upheld the lessons they learned from their own financial crises (and had a ready CLEAR plan rather some fuzzy ideological notions or BAD ideological notions) - much of Asia, Germany, Australia, Canada - withstood or avoided the economic calamities of the past 2 years. And, the ones that did not (the U.S., Great Britain, Ireland, Greece, Spain, etc.) are now dealing with their lack of due diligence, decline in skills and moral degradation.

 

When I look at the EU nations that have the highest debts, you would be surprised which ones are NOT represented - countries that have universal healthcare, free college education and some pretty liberal politics by American standards (e.g. Germany, Sweden, Denmark, Belgium, etc). This just goes to show that there is more than one path to success. But if you choose a path and then EXECUTE POORLY, you get what we have. The U.S. has the largest economy and the most diverse economy but yet it was not able to effectively use those advantages.

 

Americans clearly don't understand what they did wrong before the crisis. Debt is only part of the problem. Debt alone does not sink economies. Excessive debt is usually only a sign that something deeper is wrong in the economy and the national character. Not addressing the root causes will not resolve the debt problems. Tweaking the tax code, interest rates, currency valuations, monetary policy and elections do nothing to address the fact the the fabric of American society is dissolving because it HAS NO DIRECTION.

 

An economic and social base that is volatile or subjected to repeated disasters, that is imbalanced or unfair and does not recognize the importance of continuing maintenance of the basics will always land it in you-know-what.

 

10/30/2010 8:31 AM
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HARDMONEYMAN....  Point taken, LBJ did have his own bag of tricks.

 

reel8 and RATIONAL LIBERTY... Indeed we are losing jobs to other counties.  Both parties have had control of the congress, and The Tea Party has its agenda, filled empty  with political promises.

 

 Bringing out the facts and the issues facing Americans is how government changes. Its a matter of Americans standing together. We The People are demanding better government.

 

As Tea Parties go, it was the Colonist who began dumping tea into Boston Harbor. High Tax on Tea, etc. These Tea Parties brought  attention to bad government. King George was losing his hold over the Colonist.  As Colonist began uniting for fair marketing techniques, they also brought awareness to the foreground...  Hear yea, hear yea, Advertising:   RIGHTS OF THE PEOPLE, don't buy the damn tea !

 

 

 

 

 

10/30/2010 12:04 AM
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RATIONAL LIBERTY         SURE BOTH PARTIES ARE RESPONSIBLE FOR WHERE WE ARE TODAY BUT THE DEMOCRATS MADE OUR DEBT MUCH WORSE . THE TEA PARTY HAS BEEN A GREAT INFLUENCE ON BOTH PARTIES BUT IS USING THE REPUBLICANS TO BECOME THE PARTY OF STOP PELOSI, STOP HARRY REID, AND END THE OBAMA SOCIALISTS FROM RUINING OUR NATION. THINGS ARE SO BAD IN THIS COUNTRY NOW IT MAY TAKE 10 YEARS TO RECOVER.                       
10/29/2010 9:13 PM
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You people do not cease to amaze me. You can continue the Republican vs. Democrat arguments until you're blue in the face, but the fact of the matter is, both parties are responsible for where we are today. And it all began well over a century ago.

 

Just in the past decade, both parties have had complete control of both the legislative and executive branches. And what has changed? Did they reverse our spending trends? Did they begin to actually pay down our debts? Have they done anything to fix the failing social programs? Have they done anything to stop the outflow of American businesses to foreign countries?

 

The answer to all of these questions is a resounding, "Hell no!" In fact, they have merely accelerated those trends by piling on more regulations, taxes, and programs. And yet, we have a vast amount of ignorant people clamoring for even more. One person here is even absurdly claiming that tax cuts drive jobs overseas.

 

Honestly...how can we expect to reverse the decline of our nation and the ineptitude of our government if we choose to fight irrelevant battles and incompetently offer up stupid arguments?

 

One thing that we should all gather from this article is this:

 

Our federal government has far too much authority and has created a far too complex system that ultimately only benefits one entity - the federal government.

 

At this point, we can only hope that future generations are able to look back and see how grossly incompetent both the citizenry and the government have been in their ability to avoid an easily preventable failure. Seriously...I'm quite often embarrassed to say that many of the people who post here are my "fellow citizens."

10/29/2010 8:32 PM
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PLIB9855, IT SEEMS YOU HAVE NOT FULLY UNDERSTOOD MY COMMENTS  OR YOU CAN'T ADMIT YOU VOTED FOR THE WRONG PRESIDENT.OUR COUNTRY WAS RAPED BY THE PRESENT ADMINISTRATION AND WAIT TIL NOVEMBER 2 WHEN WE TAKE BACK OUR COUNTRY.BY THE WAY I SERVED IN THE ARMY AND HAD A TOP SECRET ASSIGNMENT IN TOKYO DURING THE KOREAN WAR AND  BEFORE I SERVED I WORKED IN THE COMPANY THAT HELPED TO END THE WAR WITH JAPAN BY MAKING THE BOMB SIGHT THAT DELIVERED THE ATOM BOMB TO HIROSHIMA AND NAGASAKI AND SAVED MORE LIVES BY ENDING THE WAR SOONER . LEFT WING DEMOCRATS TODAY ARE NOT THE SAME PEOPLE THAT HELPED HARRY TRUMAN A TRUE AMERICAN END THE 2ND WORLD WAR.

 

10/29/2010 7:30 PM
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dman001948

 

Yes, the Democrats were the party of less regulation so that Wall Street, the banks and credit agencies could collude to create a house of cards out of paper instruments. Not to mention letting the crooks from the 1st market crash (remember that one?) get away without perp walks. And, then proceeded to double down on the same policies (at the SEC, FASB, CFTC, Treasury, Fed) so that they could cause an economic crash twice as bad. Not!

 

Yes, the Democrats were the ones who voted to support TARP WITHOUT conditions on the money (as suggested by Treasury Secretary Paulson - former Goldman Sachs CEO - appointed by Bush). Not!

 

Yes, the Democrats were the ones who were drum-rolling when the votes came up to start the ground wars in Iraq (without finishing the job in Afghanistan in Tora Bora). Not!

 

Yes, the Democrats were the ones who took a $5 TRILLION debt and DOUBLED it in 8 years while they controlled BOTH the White House and both chambers of Congress. And, did it without creating any net new jobs over a decade or increasing the median income over the same time (ever heard of pump and dump?). Not!

 

Yes, the Democrats were the ones who appointed the Supreme Court majority that gave corporations the same political rights as real, flesh and blood Americans. Not!

 

That fuzzy memory starting to come back yet?

 

10/29/2010 7:16 PM
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Fragile Flame, please get your facts straight.  It was LBJ in 1967 who authorized the Social Security dollars to be added to the general fund dollars.  Look it up.  Since 1967, the FICA/Medicare payroll taxes (half of which your employer pays) have been included in the general revenues in order to make the budget figures look better.  The so-called Social Security Trust Fund is just a bunch of IOU's entered into the books.  Reagan had nothing to do with this scam.  Thank LBJ and our Tweedledee and Tweedledum Congress.
10/29/2010 7:16 PM
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The antebellum plantation owners were rich and they employed a lot of people, I don't see anyone praising them.

 

I don't care how many people these guys employ if the jobs they provide are cr@p. There seems to be a royal sense of entitlement at the top that they should be able to do whatever they feel like without regard to the consequences to anyone but themselves.

 

Witness the wonderful economy that mentality brought forth! Stagnant, in debt, divided and getting our butts kicked by emerging economies.

 

10/29/2010 6:59 PM
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Why don't you tell us about the chart of incomes and how much will be taxed on dividends and cap. gains for each income level?  Then it will help us to plan our investments.  Just talking about the high income earners and the low income earners leaves out most people. 
10/29/2010 6:52 PM
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Funny thing about corruption in government, robbing from the people and giving to the rich, its a 3rd World Country...

 

Welcome to the USA:  The Land of Governmental BS. The Land of increased taxation, inflation, increased poverty, inflated bread lines, and increased street begging.

 

Why yes, that new building is a debtors prison. Those Americans couldn't pay their bills, they lost everything when Wall Street and Corporate Banks were playing monopoly.  

 

Yes, the GOP, under President Regan, started dipping fingers into Social Security. Then again, the GOP, under President Bush and Vice President Chaney started playing with Social Security and Medicare.

 

Congress drags their feet to suit their needs and those of Lobbyist. You bet medical insurance has gone up. Paying more for less insurance, for certain. People are beginning to stay away from visiting PCP's.

 

Its becoming a matter of finding those loop holes, hiding savings (where ever one can),  keeping away from probate, and doing ones best to keep ahead.

 

I give you the new,  not improved social standards by which Americans live, RED TAPE ...

 

 

10/29/2010 6:47 PM
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reel 8 Your full of BS. what freedoms have you lost since Obama became president. People who voted for Obama aren`t real Americans. I voted for him and I served in the military and consider myself a Patriotic American. As far as civil servants they are Americans just like you and have families and bills. Federal employees are paid well. They earn their money. I feel sorry for you kittycity. The cost of living formula for Social Security benefit was passed in 1975. President Obama has proposed a one time payment of $250.00 but was blocked by the republicans
10/29/2010 6:18 PM
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Democrats would have passed most of the tax code extensions 3 months ago, if the Republicans didn't filibuster it.

BTW the economy doesn't grow when you cut taxes, unless the companies you cut the taxes for reinvest in the US.  Since most of the reinvestment is going to happen in China and India, cutting taxes will led to less economic development in the US.  Therefore, massive tax cuts for the wealthy would hurt the US economy.  This means tax and spend helps the US economy recover, when compared to the massive tax cuts for the wealthy.

10/29/2010 5:34 PM
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VOTE LIKE A TRUE AMERICAN AND WHAT IS GOOD TO HELP OUR NATION OUT OF THE MESS WE HAVE ALLOWED TO PENETRATE OUR SOCIETY. WE CAN ONLY ACCOMPLISH THIS BY REDUCING SPENDING ON SOCIAL PROGRAMS, REDUCING TAXES,DOWNSIZING GOVERNMENT THAT HAS INCREASED ITS PAYROLL OF WORKERS THAT EARN ALMOST DOUBLE WHAT THE PRIVATELY OWNED COMPANIES CAN PAY, AND RESTORE OUR FREEDOMS, FOR A GOVERNMENT OF THE PEOPLE ,FOR THE PEOPLE, AND BY THE PEOPLE. NOT BY FABIAN SOCIALISTS THAT PLAN TO DESTROY OUR REPUBLIC.
10/29/2010 4:36 PM
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Bottom line is we have not been delivered the jobs programs Obama promised to deliver. I am on Social Scurity disability and due to no increases, reduced Medicare coverage, cutbacks in mental health care in Arizona making it the worst in the nation, and the Medicare bubble coverage for drugs I am losing a house that has been in the family for 60 years. I have friends who have been out of work due to the housing industry collapse. I have had to use my IRAs to survive. I am a cancer survivor and have had to cut scheduled followups because of the large copays. I get too much for any further assistance but paid in maximum for over 25 years. Be disabled and try and live under current administration. I have already sent in my ballot and am anxiously awaiting 2012. Jobs are what this country needs, not promises--ACTION!!!!​ Roosevelt had a program that people used to nickname WE Piddle Around but it put a lot of people to work and accomplished several good projects such as dam construction. Extending unemployment benefits is not the answer, jobs are.
10/29/2010 4:32 PM
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People need to understand basic economic principles.  Cutting taxes is NOT something that needs to be paid for.  You pay for things you spend.  Cutting taxes is not something that is being spent.  Instead it is a DECREASE in revenue to the fed.  Washingtong does not have a revenue problem - it has a spending problem.  Period.  The entitlement programs are out of control and getting more so.

As for the death tax, that is precisely what it is.  When you die, why should I be entitled to ANY of the wealth you have earned over the course of your life.  It is your choice what to do what that wealth - regardles of the size of the wealth.  On top of that, you have already paid taxes on every single penny of that wealth.  Would you really want me deciding how to use the results of your life's work?  If you do, then go live with Hugo Chavez or Fidel Castro for a couple of years.  Let me know how that works out.

10/29/2010 4:25 PM
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For those who are confused...

 

Not "extending" tax rates as they are today - and allowing taxes to increase - is the exact same thing as a tax increase. (Notice the similarity between the word "increase" and the word "increase.") Whether or not the increase in taxes is a new bill or the expiration of an old one is irrelevant. Taxes and costs will go up - for everyone.

 

And for those who do not understand the "costs" of tax increases and reductions...

 

Cutting taxes does not "cost" the government any money. Increasing spending does. The revenues collected by the government are taken from those who have earned it. It is not the government's money by default. The way government is supposed to work is, they collect taxes in order to pay for their constitutional obligations. If it doesn't have the money, it doesn't perform its duties. Governments are not supposed to create unnecessary or unwanted programs - or unconstitutional ones -  then try to figure out how to or if they can pay for it, then claim that by not raising taxes their programs will not be paid for, therefore, more/higher taxes are needed and will be implemented, even if it hurts our economic well-being.

 

The last time I checked, governments that acted in such a manner were not acting under any legitimate authority. Some would even say that it's tyranny.

 

But I would like to ask all of you who seem to think that increasing taxes only on a certain number of people in order to pay for things that benefit us all - or in some cases, certain other people who have not paid the taxes - is perfectly reasonable, or even fair:

 

By what right can you demand, through your government, the earned wealth and/or property of another individual? By what right does the government charge itself with the task of confiscating that property in order to benefit other individuals?

 

And we wonder why the best years of this country are behind us...

10/29/2010 3:56 PM
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Thanks Jeff, for sharing the "origins" of the word "politics" - really made my day - I loved it!Smile

 

Remember - NOBODY is voting for a Tax Increase - instead, the TEMPORARY Tax Decrease -with a 2010 expiration date - was voted in by the Bush admin and a GOP controlled congress. The GOPs set the expiration date.

 

Now the DEMs want to extend all these taxcuts for everyone - except those making over $250K/year. Unfortunately, the GOPs are on record for not allowing that to happen. I am in that 97% of the populus who hope the DEMs will succeed on this one.

 

Actually, none of the threatened "tax hikes" in this article have a chance to occur - all of congress is in agreement to EXTEND the TEMPORARY Tax Reductions. Unfortunately, the GOPs are not accepting a 97% solution this time around (EVER?) - apparently compromise is not in their vocabulary.

 

10/29/2010 3:29 PM
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The expiration of Bush's tax cuts is an expiration of something that was never paid for and never should have been. So it's not call it a tax hike, okay?

 

I say let it all expire, and than go back and make new tax cuts that are paid for. Also, because disparity between the richest 2% and the rest of the people is so out of control, we still need a progressive tax -- Look at the GINI coefficient, and how incomes for the richest 2% grows five times faster during Republican control. Do we want to be a plutocracy or a democracy?

 

I say democracy in which a middle class is important. So for now, at least, let the Estate Tax return and let Bush's tax fiasco roll back for the richest 2%.

 

Then let's get to work on abolishing deductions. These only allow people to cheat, and also are a form of redistribution of wealth. Let's remove sales taxes on basic needs--food, rent/mortgage payments, utilities, and hike sales taxes on unnecessary consumption.

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