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Bush's Tax Cuts
Not Only For The Rich
August,
2010
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Dear Heidi,
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The Bush tax cuts (from legislation enacted in 2001 and
2003) are scheduled to expire at the end of this year. But you may not
understand the full extent of what is in store if Congress simply sits
back and allows the expirations to occur without making any changes.
The following article simply informs you of what could happen if no
action is taken.
Here's the little-known truth.
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HIgher
Taxes for All
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There
will be Higher Income Tax Rates for All
Some people may believe that only individuals in the top two federal
income tax brackets will face higher rates when the Bush cuts go
bye-bye. Not true! Unless Congress takes action, rates will
automatically go up for everyone who pays taxes-not just "the
rich."
The existing tax brackets will be replaced as follows: (existing on
left >> new on the right)
10% Tax bracket >> 15%
25% Tax bracket >> 28%
28% Tax bracket >> 31%
31% Tax bracket >> 33%
33% Tax bracket >> 36%
35% Tax bracket >> 39.6%
Outlook: The 28% bracket would be expanded to accommodate unmarried
taxpayers with income below $200,000 and joint filers with income below
$250,000. Only taxpayers with income above those levels would be
affected by the new 36% and 39.6% rates. To sum up, the only thing we
know for sure is that tax rates will go up for everyone if Congress
sits on its hands.
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Marriage Penalty
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Marriage
Penalty Will Get Worse
The Bush tax cuts put some relatively favorable framework for married
individuals in place to reduce the so-called marriage penalty, which can
cause a married couple to pay more federal income tax than if they were
single. Unless Congress makes changes and the president goes along, the
marriage penalty will automatically get worse when the Bush tax cuts
expire.
Outlook: Presumably, the Administration's pledge to keep things the same
for lower and middle-income taxpayers includes extending the Bush tax cut
elements that reduce the impact of the marriage penalty.
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Itemized
Deduction Phase-Out
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Under the Bush tax cuts, the phase-out rule covering the big-ticket
deductions for mortgage interest, state and local taxes, and charitable
donations was gradually eased and finally eliminated this year.
Next year, however, it will automatically return with a vengeance,
unless Congress takes action and the president goes along.
Outlook: The Administration has said it wants the phase-out rule back,
but at higher income thresholds of $250,000 for married joint-filing
couples and $200,000 for other taxpayers. Raising the thresholds
would require Congress to take action and the president to go along.
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Personal
Exemption Phase-Out
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Under the Bush tax cuts, this phase-out rule, eliminating
some or all of a higher-income individual's personal exemption deductions,
was gradually eased and finally eliminated this year. Starting next year,
it will automatically return, unless Congress takes action and the
president goes along.
Outlook: The Administration has said it wants the phase-out rule back,
but at different income thresholds: $250,000 for married
joint-filing couples, $200,000 for unmarried individuals and $125,000 for
those who use married filing separate status. It would not be
surprising if Congress chooses to do nothing.
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Capital
Gains and Dividends
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The
maximum federal rate on garden-variety long-term capital gains and
qualified dividends will increase from 15% to 20% starting next
year. (18% on gains from assets held for over five years).
Dividends will once again be taxed at ordinary income rates. So,
the maximum rate on dividends will balloon to a whopping 39.6%.
Right now, a 0% federal rate applies to garden-variety long-term capital
gains and qualified dividends collected by folks in lowest two rate
brackets of 10% and 15%. Starting next year, the "new"
lowest bracket of 15% will have to pay 10% on long-term gains (or 8% on
gains from assets held for over five years) and 15% on dividends (since
dividends will be taxed at ordinary income rates). Again-these things
will happen automatically, unless Congress takes action and the president
goes along.
Outlook: The odds are rising that dividends will once again be taxed at
ordinary rates (of up to 39.6%), starting next year. We hope this is
wrong.
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Some
Cuts That Are Likely to Continue
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Some
elements of the Bush tax cuts have gained bipartisan support and become
"extenders." Examples include inflation-indexed Alternative
Minimum Tax exemption amounts, the ability to use nonrefundable personal
tax credits to offset individual AMT liabilities, the above-the-line
deduction for qualified higher education tuition and fees, and the
increased Section 179 deduction.
We also believe the current versions of the child tax credit, earned
income credit, dependent care credit and adoption credit are also likely
to be continued.
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Despite what some people think, the Bush tax cuts don't
just help "the rich." They help just about anyone who
pays federal income taxes. The scheduled demise of the Bush tax cuts next
year will hurt lots of people, unless Congress makes changes and the
president jumps on board. Stay tuned (or better yet, call your
congressman to voice your concerns) for updates as this develops during
the rest of 2010.
The above article is from "Five Minute Tax
Briefing," James A. Keller, CPA, J.D. and Brian Martin, CPA.
Five-Minute Tax Briefing Editors
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Heidi Wisneski, Adm. Assistant
C&L Value Advisors LLC
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