As Americans, we are experiencing unprecedented levels of uncertainty in the tax laws, which wreak havoc on any hopes of year-end tax planning. Not having a consistent long-term tax policy in place creates a negative effect on the overall economy. Small business owners are reluctant to make large purchases, hire employees or expand their businesses because they are unsure of the costs. Without clear leadership and coherent policy from the Administration and Congress, there will be no effective solution.
Congress has failed to act on tax laws that have already expired, which may or may not be retroactively reinstated, and others that will expire at the end of this year. There are also 21 new taxes that are slated to go into effect Jan. 1, under the Affordable Care Act, also known as Obamacare, which may or may not be repealed in whole or in part.
How You May Be Affected Jan. 1
If Congress takes no action, the Bush-era tax cuts will expire and new tax laws will take effect. Most American taxpayers will experience a tax increase. Here’s what to expect:
- Long-term capital gains rates will increase from 15 to 20 percent. The tax rate on qualified dividends will jump from 15 to 39.6 percent.
- The 2 percent payroll tax cut expires, resulting in higher taxes for about 163 million working Americans.
- 21 new taxes imposed by the 2010 Obamacare legislation take effect. I will not address these at this time because some or all could be changed by the new Congress.
Increases affecting low, middle class
- The lowest tax bracket will be 15 percent. The 10 percent bracket will disappear entirely. Everyone who pays income taxes will pay more.
- Many families may lose $500 of the Additional Child Tax Credit for each qualified dependent child on their tax return.
Increases for High-income Families
High-income families will experience many of the tax increases addressed above, as well as the following:
- The top rates on ordinary income increase from 35 to 39.6 percent.
- Self-employment taxes/Social Security taxes will now be due on earnings up to $113,700.
- The Medicare portion of Social Security and self-employment taxes increase from 2.9 to 3.8 percent on earned income topping $200,000 for single persons or $250,000 for joint filers.
- There’s a new 3.8 percent “Unearned Income Medicare Contribution” (which sounds so much better than “tax”) on “net investment income” (interest, dividends, capital gains, rents, royalties and annuities) for those with total income more than $200K for single or $250K for joint filers.
- Many high-income Americans will experience phase-outs of their itemized deductions and personal exemptions costing them more in taxes.
- If the Alternative Minimum Tax (AMT) patch is not reinstated, AMT reverts back to the 2000 year level, which could subject 29 million more families to the AMT, causing them to pay much more in taxes than they did in the prior year.
- Estate taxes, which currently start at 45 percent on estates more than $5 million, will jump to 55 percent on estates over just $1 million.
When You Can File
Tax season could be delayed, if in this post-election moment the lame-duck Congress fails to finalize the tax laws or does not do so until late December. Or, the delay could come from the Democrats who decide to address the issues in January with their majority members in place. If that were to happen, and Congress made its intentions known, the IRS would not be able to move forward implementing the tax filing season. The reason is, they would not know which tax provisions would ultimately become the law of the land. After all, perhaps the new Congress would be successful in making the new tax laws retroactive.
According to a report from the Joint Committee on Taxation, JCX 1-12, there are 101 tax provisions that expired in 2011 or will expire in 2012. Will some be extended? Will some be made retroactive? The more time Congress takes to deal with the expiring tax provisions, the less likely tax season will start on time.