Andy Powers-A Professional who cares..About YOU!
Tax Hikes On The Horizon
Although it would be political suicide to impose major tax reform with increased tax burden on Americans during the worst economic recession experienced since the Great Depression, the truth is that someone has to pay for all the government spending and that someone is “we-the people”. So if I had to guess I would say we can expect major tax reform in 2011. Targeted will of course be families with income over $250,000 and singles with incomes over $200,000; however as we have learned from experience, increased taxes come in two forms. First through tax rate increases and the other through elimination or restrictions placed on deductions. Based on my experience we will see a blend of the two so the revenue raisers reconcile with the budget deficit.
As the 2001 Tax Act (the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) approaches sunset most middle income Americans will see some sort of increase in their tax bills. As we informed our clients and posted on the Tax Power website back in 2001, unless Congress renews the legislative tax reductions from the 2001 Tax Act by 2010, the tax laws (as affected by EGTRRA) will revert to where they stood prior to their enactment in 2001. Some say as Congress has been working on this since 2002 it is unlikely that nothing will be done to extend the benefits, but let us not forget that small amounts of money collected from many people accumulate is what makes this country operate.
EGTRRA is responsible for today’s 10% minimum tax rate, the lowest in our nations history since the imposition of income taxes, while most lower middle income taxpayers have grown to enjoy a 15% rate. Those in higher income categories saw their highest rate drop from 39.6% to 35% and many enjoyed increased itemized and personal exemption deductions. The down side was that the number of taxpayers subject to Alternative Minimum Tax nearly doubled. We also saw a drastic reduction in taxes on investment capital gains and dividends. Along with a significant reduction in income taxes was the phase out of personal estate tax. Also it encouraged retirement savings by increasing the amounts that could be invested in retirement accounts. Ironically those who followed old school thinking and put the money in guaranteed interest CDs may not have earned much but they got a nice tax deduction while protecting their investments. Those who followed the Bears into slaughter lost a lot more than they gained by any tax savings.
Again, if nothing is done, the tax laws affected by EGTRRA will revert to where they were prior to the enactment of the 2001 Tax Act. Will something be done, I say yes; however hold on to your hats. My prediction is that the 10% tax rate will be maintained for the lowest rate along with possibly an increase in the standard deduction. A political “hurrah” for those who don’t pay much tax to begin with. I predict that middle income taxpayers will be hit hardest, proportionately, as I expect a claw back of certain itemized deductions combined with a modest rate increase. As far as estate taxes are concerned, I predict a compromise settlement-yet certainly a reinstatement of some form of estate tax. As regards retirement savings, I see caps being put on amounts that employers can contribute to tax deferred retirement savings accounts combined with an income imputation for the value of employer provided health care premiums.
My suggestion is to put away as much as you can today in tax deferred retirement accounts (but be certain you won’t need it before you retire-and don’t borrow money to put in the plan if you can’t pay it back in one year). Stay in touch with news of pending tax reform and most important let your Congressional Representatives know if they want to get re-elected they need to do what you want them to do, not special interest groups or the Administration.