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How Much More Will You Be Paying If Bush Tax Cuts Expire?
– August 5, 2010

2011Several major income tax cuts are set to expire at the end of 2010 if nothing is done by Congress.  These tax cuts were first enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 and later extended by other acts.  These tax cuts are scheduled to revert to 2001 law on January 1, 2011, because they were originally enacted on a temporary basis. Congress now faces the issue of whether to let the tax cuts expire or extend them.

Below, is a list of some of the most well known provisions that, if allowed to expire, would have a significant impact on the nation’s taxpayers.

  • The standard deduction for married couples will decrease, no longer double what it is for single filers
  • The ceiling of the 15% bracket for married couples will decrease, no longer double what it is for single filers
  • The 10% individual income tax bracket will expire, reverting to 15%
  • The 25% individual income tax rate would rise to 28%
  • The 28% individual income tax rate would rise to 31%
  • The 33% individual income tax rate would rise to 36%
  • The 35% individual income tax rate would rise to 39.6%
  • The 0% and 15% tax rates on long-term capital gains would expire, rising to 10% for lower tax brackets and to 20% for higher tax brackets
  • The current qualified dividend tax rates of 0% for lower tax brackets and 15% for higher tax brackets would rise to ordinary income tax rates for all individuals
  • The child tax credit will decrease from $1,000 to $500
  • The personal exemptions phase-out (PEP) would be restored, decreasing the value of exemptions for high income people
  • The overall limitation on itemized deductions (Pease limitation) would be restored, decreasing the value of deductions for high income people
  • The estate tax would be restored with an exemption level of $1 million and rates that top out at 55%

The Obama administration’s budget allows for some of these tax cut provisions to be preserved but the ones that benefit couples who earn more than $250,000 and singles making more than $200,000 will likely be allowed to revert to their higher, 2001 levels or they will be raised in some other way.

In addition to the above changes, the recently passed healthcare reform package imposes a new 3.8% Medicare contribution tax on investment income of higher-income individuals.  Scheduled to take effect in 2013, the 3.8% tax will apply to the lesser of net investment income or the excess of modified adjusted gross income over the threshold amount.  “Net Investment income” includes interest, dividends, capital gains, annuities, royalties, rents and other income attributable to a passive activity.

The tax applies to the lesser of net investment income or modified adjusted gross income above $200,000 for individuals and heads of household, and $250,000 for joint filers and surviving spouses, and $125,000 for married filing single filers.  These thresholds are not indexed for inflation, so more taxpayers may be affected in future years.  With the expiration of the lower qualified dividends and capital gain rates in 2010 and the increase in the Medicare tax on investment income in 2013, the tax rate that is currently 15% on capital gains and qualified dividends could be much higher for high income individuals as shown below.

Capital Gains – The current rate on long-term capital gains is 15%.  This rate is scheduled to revert to 20% in 2011.  With the added Medicare tax beginning in 2013 the overall tax rate would be 23.8%.

Qualified Dividends – Qualifying dividends are currently taxed at 15%.  Without action by Congress this tax rate will expires at the end of 2010, increasing the top rate on dividends from 15% to 39.6%.  In 2013 when the Medicare tax kicks in this rate would be 43.4%.

Although these changes do not take effect until 2011 and 2013 for the additional Medicare tax, it is not too soon to start planning for ways to decrease the impact of the changes.

 

Malia WollersonMalia Wollerson, CPA
318.429.2111
mwollerson@hmvcpa.com

Malia Wollerson is a Tax Manager at Heard, McElroy & Vestal. She received both a bachelor and master degree from Louisiana Tech University.

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