Friday, November 12, 2010

Preparing for the Tax Avalanche Ahead in 2011: What You Need to Know...

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Preparing for the Tax Avalanche Ahead in 2011: What You Need to Know...
Giving Tax Money
Beginning on January 1, 2011, multiple waves of new taxes and tax increases will start hitting the fragile American economy like an avalanche. The coming tax avalanche threatens businesses and individuals, the rich and the working class – and needless to say, the entire economy.
Since Congress had neither the courage nor the decency to come up with a clean tax bill before the election, much uncertainty remains as to just how draconian the tax hikes will be. Obama says he only wants to raise taxes on the rich, but we've heard that line before in advance of new taxes that ultimately extend to the middle class.
The one thing that is certain is that if nothing is done, the Bush tax cuts will expire and the biggest series of tax increases in U.S. history will be upon us come January.
Virtually Nobody – Living or Dead – Is to
Be Spared from Tax Increases in 2011
The potential extent of the tax pain to come has been broken down and tabulated by Americans for Tax Reform, whose findings follow:
  • Personal income tax rates will rise.
    • The 10% bracket rises to an expanded 15%
    • The 25% bracket rises to 28%
    • The 28% bracket rises to 31%
    • The 33% bracket rises to 36%
    • The 35% bracket rises to 39.6%
  • 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 $1000 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 January 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 their loved ones. (Recently, it was reported that some elderly citizens are actually planning to halt their use of dialysis before the end of the year to ensure they can leave their children ample money.)
  • 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.
  • The AMT will ensnare over 28 million families, up from 4 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 ultra-wealthy taxpayers.
  • Small business expensing will be slashed and 50% 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 way 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 over time.
  • Tax
  • 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 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. Qualifying withdrawals from Coverdell Education Savings Accounts will be taxed. 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.
As if all this weren't enough, 20+ new tax intrusions imposed by Obamacare – on everything from drug makers to health insurance plans to Health Savings Account withdrawals– will begin going into effect in 2011. (The 10% tanning tax has already gone into effect.)
Being Tax Savvy is More Important than Ever
Obviously, the political and tax environment will be undergoing some changes in the months ahead. We doubt the changes will be dramatic enough to do much good for beleaguered taxpayers who are struggling to carry their existing federal, state, and local tax loads.
But as developments on the tax front take shape, paid, active subscribers to Independent Living will be kept updated with new strategies for coping with ever-increasing tax mandates and tax complexity – as well as opportunities we uncover for saving you money even as taxes proliferate.
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