November, 2010 – The Effect on Taxpayers of the Expiration of the Bush Tax

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By the NumbersJuan Cocuy

 

The Effect on Taxpayers of the Expiration of the Bush Tax Cuts

 

By Juan Cocuy

 

By the printing of this, the election season will have come to an end, expired, as what will happen soon to the Bush Tax Cuts.  If you are like me, you are probably so sick of the finger pointing between Democrats and Republicans.  Throw in the mix a prominent independent, Charlie Crist, and a new faction/party, the Tea Party, and it has been nastier than ever with the accusations of who is at fault for the worst economic crisis since the Great Depression.  Possibly hanging in the balance is the Jobs and Growth Tax Relief and Reconciliation Act of 2003, otherwise known as the “Bush Tax Cuts.”  Because a major portion of this act “sunsets” on December 31, 2010, Congress and the President are going to be in a battle for what needs to be done.  If these cuts are allowed to expire, tax rates will go back to previous higher rates.

 

Throughout local and national contests, this election season has been a brutal war of accusations and negative campaigning.  Even though both Democrats and Republicans are savagely opposed on many issues, the one issue that they seemingly agree on is that taxes should be reduced for the middle class.  If the Bush Tax Cuts expire, however, this is not going to happen, they will, in fact, increase.  If nothing is done, the lowest tax bracket will increase from 10% to 15%.  The top rate will go from 35% to 39.6%.  This means that a taxpayer in the lower brackets will pay a few hundred more in taxes and those in the higher brackets will owe thousands more.  For instance, a family with taxable income of $25,000 will have to pay $1,250 more in taxes.  That is easily one mortgage payment.  A family with taxable income of $150,000 will have to pay approximately $7,000 more in taxes.  That could be a family’s mortgage payment for 2 or three months plus groceries and gas.

 

Child tax credits, which many people rely on to lower their tax bill, are being cut in half from $1,000 per child to $500.  Other areas that will impact the middle class include the reinstatement of the “marriage penalty” and the increase in capital gains tax and tax on corporate dividends.  Capital gains will go from 15% to 20% and tax on dividends will go from 15% to ordinary tax rates.  It doesn’t take a rocket scientist to conclude that this will have a negative impact on the economy as discretionary income will be cut and, therefore, less money will be available for consumer products, both discretionary and necessary.  Savings and investments will decline and as a result, the stock market may have another bear market. 

 

Estate taxes are also scheduled to return to as high as 55%.  This year, 2010, was the last year of the phase out period, and estate taxes actually got to a zero rate.   This means, if you are very wealthy, this is a good year to die.  (Everyone knows that George Steinbrenner saved his family $385 million in estate taxes by kicking the bucket this year.)

 

If Congress and the President lock up and can’t get a bill passed, we will be stuck with the above.  Or, they could decide they need more time and extend the Bush Tax cuts another year.  Barring a miracle that results in actual cooperation from both sides of the aisle and the President, these two appear to be the likely outcomes.  President Obama and others are convinced that they need to tax the “rich,” those making more than $200,000 per year.  The problem is that by doing so business owners, entrepreneurs, etc., those who create jobs will be hurt. The economy currently needs to create more jobs not reduce them, so raising taxes is probably not the answer.  In any event, maybe after all these candidates are done slinging the trash at each other, maybe they will get to work on something that will get the economy back on track.  Ah, wishful thinking.

 

As usual, if you have any questions on this or other topics, please feel free to call me at 561-793-1927.

Juan C. Cocuy CPA

About Cocuy, Burns & Co., P.A. Located at 12400A South Shore Boulevard, Cocuy, Burns & Co., P.A. is the only full-service CPA firm in the western communities. We have been in business for over 20 years and provide a full menu of services to the professionals and businesses in our area including tax compliance and planning, auditing and consulting. We can be reached at 561-793-1927 or by visiting www.cocuyburns.com.