We keep hearing about the Bush-era tax cuts and what it will mean to tax payers come December 31st, 2010. The lame duck session of Congress started on November 15th and the number one issue that needs to be figured out is what to do about all the tax cuts that are set to expire the end of this year. And, that means the IRS cannot even publish this year's 1040 form until such time as Congress has decided what it will do.
You can bet that there will be a bunch of political wrangling and posturing after the Republicans gained their power after the mid-term elections and you can also be sure that we Americans who voted these new representatives in will be watching closely.
It's not an easy matter. The U.S. is further in debt than ever before and these taxes, if raised, would help to stem the outflow of money. But, the U.S. economy, and namely the middle class, cannot afford to have their taxes raised. It would mean a further reduction in spending and most likely the collapse of the housing market, which is already in a shambles.
Both sides have agreed that compromise will be necessary, but we all know how that can go. The Democrats are liable to push even harder, only because their numbers are down and the Republicans, all puffed up with victory will be loathe to give an inch either. It's going to take some really mature people willing to do what is best for the people to come up with a plan that will work for everyone. President Obama wants to preserve the tax cuts for everyone earning less than $250,000, but the Republicans want to make all the tax cuts permanent. The problem is this...if they cannot agree by the deadline, which is December 31st, all the taxes will go up.
This is the worst-case scenario:
• Estate taxes would go up to 55% with only $1 million being exempt from taxation. Starting in 2001, the estate taxes went down, ending at zero, nada, zilch in 2010. That led to people hoping that rich Grandma or Grandpa would die in 2010, because the lucky heirs could keep the whole enchilada and not pay a dime of taxes to Uncle Sam. People used to think it was funny, back in 2001, but it's not so funny now. You can even picture the more unscrupulous wanting to discontinue life-support on rich relatives who probably won't live much past December 31st anyway. On a multi-million dollar estate there is a lot of money at risk.
• Capital Gains and Dividend taxes would go up. Right now they are capped at 15%, but will be one of the Bush tax cuts that expires at year end. If allowed to expire, the capital gains tax will rise to 20% and the dividend rates will rise to the same that a taxpayer pays on his or her income. That could be a high of 39.6%. This will disproportionately affect older investors. The Tax Foundation reports that taxpayers over the age of 55 accounted for 71% of all earned dividends in 2008 and how can you possibly encourage saving or investing when anything you earn in that matter will be subject to high taxation?
• The Alternative Minimum Tax (AMT) will catch more and more Americans if nothing is done about it. It was originally put into place so that the really rich could not escape paying a tax bill, requiring that taxes be figured two different ways and that taxpayers pay the highest of that tax. The problem is that it was never indexed for inflation, which means that as inflation grows, so do the number of tax payers that will have to pay the AMT. If a patch is not put in place for 2010, some 21 million taxpayers will be stuck paying the AMT. This is not a good thing!
So, again, we find our money in the government's hands and are hoping they do the right thing. Doing nothing, in this particular case, could be much worse than doing something, regardless of what that "something" is.
