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Taxes We Can Look Forward To

By JLP | July 22, 2010

I saw this article on the IBD website about the future of the Federal Income Tax. I’m not looking forward to this future:

“The lowest bracket for the personal income tax, for instance, moves up 50% — to 15% from 10%. The next lowest bracket—25%—will rise to 28%, and the old 28% bracket will be 31%. At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.”

What does that mean, dollar-wise? Let’s take a look at a family with $50,000 in taxable income. Not adjusting the brackets for inflation but adjusting them for the new percentages, here is what how they might look from 2009 to 2011:

So this family is looking at paying $835 more just in this part of their income tax bill—and that’s not counting adjustments for child tax credits or other adjustments.

According to the article, the marriage penalty will also make a comeback. Capital gains taxes will go up to 20% (from the current 15% rate). Taxes on dividends will also go back up to a maximum of 39.6%.

There will also be a new 3.8% medicare tax on capital gains for those with incomes over $250,000 (married filing jointly—$200,000 for single filers).

Complicating all of this is the alternative minimum tax, which if it isn’t “fixed,” will trap 28 million families.

The estate tax will also make a comeback in 2010.

The article lists several other taxes too. Combine all these with state and local taxes, which are most likely to go up since states and municipalities are broke, and we’re looking a spending lots more in taxes.

Time to sock away the maximum you can into your 401(k) and Roth IRAs (no tax benefit up front but can help out years down the road during retirement).

Topics: Tax Planning, Taxes | 12 Comments »


12 Responses to “Taxes We Can Look Forward To”

  1. Beeg Says:
    July 22nd, 2010 at 8:09 am

    I thought Obama said he wasn’t raising taxes on anyone making less than $250K as a family ($200K) single.

    You wrote a summary about this a couple of months ago.

  2. JLP Says:
    July 22nd, 2010 at 8:19 am

    You’re right, I did. I read the IBD article and thought it was a good summary so I wrote another post about it.

    Polititcians always say stuff to get elected.

  3. Nick Says:
    July 22nd, 2010 at 9:09 am

    Just a typo/correction – the estate tax comes back in 2011.

    It would be itneresting to see the calculation for someone making $250,000 too.

  4. Jonathan Says:
    July 22nd, 2010 at 9:11 am

    Buckle up:

    Tax Hikes and the 2011 Economic Collapse

  5. Depaul Says:
    July 22nd, 2010 at 9:37 am

    401(k) and Roth IRAs are not long-term safe havens from the Tax Collector.

    They merely exist as provisions in the current Federal ‘tax code’ — and can be changed or deleted at Congressional whim, just like the rest of the tax code.

    Tax-Code tinkering never ends and the overall tax rate only trends in one direction — up.

    Facing huge Federal debts, Congress is now quietly lusting after the cash balances in these private retirement funds. Informal proposals already push that some or all 401k/IRA investments must be in U.S. Government bonds…. an easy way for Congress to get their hands on all that money.

    Americans’ faith in Congress as an honest & effective agency is now down to 11% in national polls.

  6. Stacey Says:
    July 22nd, 2010 at 9:50 am

    This is another example of why converters to Roth IRAs need to be mindful of future tax rates if they elect to spread their pmts over the 2-year period. It might be best to just bite the bullet in 2010.

  7. Don Says:
    July 22nd, 2010 at 10:07 am

    @Depaul: Obviously taxes don’t always go up, since the article is very much about how they’ve done down in the past. When taxes are at record lows and debt is getting out of control, I suppose it is fair to expect taxes to go up.

    Presumably this will affect the “half of Americans don’t pay federal income tax” talking point that I’ve heard several times since Obama was elected.

  8. Stacey Says:
    July 22nd, 2010 at 10:12 am

    Also, the medicare tax will be increasing in 2013 from 1.45 to 2.35% on “high” earners…

    This is straight from a CPE Webinar I did in May:

    It will apply to combined wages on joint
    returns in excess of $250,000, 125K married sep, $200K for everyone else

    The net investment tax you referred to above will apply to: interest, dividends, annuities,
    royalties, rents, and net gain from sale of nonbusiness property, AND from passive income and income from trading financial instruments and commodities

    And for those unlucky in the medical expense dept: those under 65 will see their deductibility threshold go from 7.5% to 10% of AGI starting in 2013. Those 65 and older get a reprieve until 2016. Provision applies if EITHER spouse turns 65 before the end of the tax year.

    Also, flex spending accounts will be limited to $2,500 starting in 2013

  9. Depaul Says:
    July 22nd, 2010 at 11:36 am

    # Don Says: ” @Depaul: Obviously taxes don’t always go up, since the article is very much about how they’ve done down in the past. When taxes are at record lows and debt is getting out of control, I suppose it is fair to expect taxes to go up.
    Presumably this will affect the “half of Americans don’t pay federal income tax” talking point that I’ve heard several times since Obama was elected. ”
    __________

    The original 1913 Federal Income tax rate was only 1% on incomes over $3,000; 99% of Americans thus paid no income tax at all. Seems you have a very short historical perspective on “record low” taxes.

    Tax code rules & rates do indeed vary over the decades, but as I said: “…the overall tax rate only trends in one direction — up.”

    It’s not “fair” to expect higher taxes with out of control debt — the solution is to severely restrict Congressional spending.

    That “half of Americans {who} don’t pay federal income tax” are still savaged by highly regressive payroll taxes… so there’s little left to squeeze out in ‘income taxes’ for reckless Federal spending.

  10. JLP Says:
    July 22nd, 2010 at 11:45 am

    “highly regressive payroll taxes”

    I don’t like that term because it’s misleading. Those are lower income levels are going to get back more of their money from these payroll taxes than those at higher income levels.

  11. Mike Hates Music Says:
    July 22nd, 2010 at 2:09 pm

    > I thought Obama said he wasn’t raising taxes on anyone making less than $250K as a family ($200K) single.

    The upcoming Federal rate increases were enacted into law in 2001.

  12. Tracy Says:
    July 22nd, 2010 at 4:20 pm

    Won’t matter. At the going rate, we’ll all be unemployed by then anyway, so will have no income for them to tax… ;)

Comments