Quote:
Originally Posted by
Kathryn
but all the while his plan was to allow the tax cuts to expire, which in effect raises taxes on nearly EVERYONE.
How does that raise taxes on everyone?
Thank you for the opportunity to illustrate:
how-the-expiring-bush-tax-cuts-affect-you: Personal Finance News from Yahoo! Finance
Higher Tax Rates for All
You may have been led to believe that only individuals in the top two brackets will face higher federal income taxes when the Bush cuts go bye-bye. Not true! Unless Congress takes action and President Obama goes along, rates will go up for everyone -- not just a sliver of the wealthiest Americans.
The current six rate brackets of 10%, 15%, 25%, 28%, 33% and 35% will be replaced by five new brackets with the higher rates of 15%, 28%, 31%, 36% and 39.6%. Just a few months ago, it seemed like a safe bet that Congress would make a fix to keep the existing 10%, 15%, 25% and 28% rate brackets to help out lower and middle-income folks.
That bet is now looking iffy.
Higher Capital Gains and Dividends Taxes for All
Right now, the maximum federal rate on long-term capital gains and dividends is only 15%. Starting next year, the maximum rate on long-term gains will increase to 20%.
The maximum rate on dividends will skyrocket to 39.6% unless action is taken to limit the rate to 20%, as the president has repeatedly promised. Plan on 39.6%, and hope I'm wrong.
Right now, an unbeatable 0% rate applies to long-term gains and dividends collected by folks in lowest two rate brackets of 10% and 15%. Starting next year, those folks will pay 10% on long-term gains and 15% and 28% on dividends (compared with 0% now) unless a change is made. Otherwise, taxes on long-term gains and dividends will go up for everyone.
Return of the Marriage Penalty
Right now, the standard deduction for married joint-filing couples is double the amount for singles. For this, we can thank the Bush tax cuts, which included several provisions to ease the so-called marriage penalty. The penalty can force a married couple to pay more in taxes than when they were single. Starting next year, the joint-filer standard deduction will fall back to about 167% of the amount for singles
unless Congress takes action and the president approves. We don't know if that will happen. If not, lots of lower and middle-income couples will face higher tax bills.
Now, the bottom two tax brackets for married joint-filing couples are exactly twice as wide as those for singles. That ratio helps keep the marriage penalty from biting lower- and middle-income couples.
Starting next year, the joint-filer tax brackets will contract, causing higher tax bills, unless a change is made.
Return of Phase-Out Rule for Itemized Deductions
Before the Bush tax cuts, a nasty phase-out rule could eliminate up to 80% of a higher-income individual's itemized deductions for mortgage interest, state and local taxes, and charitable donations. The rule was gradually eased and finally eliminated this year. Next year, it will be back in full force unless Congress takes action -- which is unlikely.
So if you itemize and have adjusted gross income above about $170,000 ($85,000 if you use married filing separate status), be ready for this phase-out rule to take a toll.
The Bottom Line
The Bush tax cuts don't just offer tax relief to the wealthiest Americans. They offer it to just about anyone who pays federal income taxes. Their scheduled demise next year will raise the tax bill of nearly every taxpayer, unless Congress makes changes and the president jumps on board.