TAX MAN IN THE LAND OF CONFUSION

Christopher MarkowskiArticle, Financial PlanningLeave a Comment

Let me tell you how it will be. There’s one for you, nineteen for me. Cause I’m the taxman. Yeah, I’m the taxman. Should five percent appear too small, be thankful I don’t take it all. Cause I’m the taxman. Yeah, I’m the taxman. If you drive a car, I’ll tax the street. If you drive to city, I’ll tax your seat. If you get too cold, I’ll tax the heat. If you take a walk, I’ll tax your feet. Taxman! Cause I’m the taxman. Yeah, I’m the taxman.

Don’t ask me what I want it for, If you don’t want to pay some more. ‘Cause I’m the taxman. Yeah, I’m the taxman. And my advice to those who die. Declare the pennies on your eyes. Cause I’m the taxman. Yeah, I’m the taxman.

And you’re working for no one but me.

The Beatles

One thing I hate more than paying exorbitant taxes, is writing about them. Our tax code is currently approaching the 70,000 page mark. Throw in the complexity of the Obamacare we are looking at a real mess. In just under six months, the largest tax hikes in the history of America will take effect. The following are some of changes that we all have to look forward to.
Expiration of 2001 and 2003 Tax Relief

In 2001 and 2003, Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011:

Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:

– The 10% bracket rises to an expanded 15% – The 25% bracket rises to 28% – The 28% bracket rises to 31% – The 33% bracket rises to 36% – The 35% bracket rises to 39.6%
Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care and adoption tax credits will be cut.
The return of the Death Tax. This year, there is no death tax. For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013.

Obamacare

There are over twenty new or higher taxes in Obamacare. Several will first go into effect on January 1, 2011. They include:

The “Medicine Cabinet Tax” Thanks to Obamacare, Americans will no longer be able to use their health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).

The “Special Needs Kids Tax” This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently, there is no federal government limit). There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C.(National Child Research Center) can easily exceed $14,000 per year. Under current tax rules, FSA dollars can be used to pay for this type of special needs education.

The “HSA Withdrawal Tax Hike.” This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

The Alternative Minimum Tax and Employer Tax Hikes

When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise, the AMT won’t be held harmless, and many tax relief provisions will have expired. The major items include: The AMT will ensnare over 28 million families, up from 4 million last year. According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers. Small business expensing will be slashed and 50% expensing will disappear. Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000. This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be “depreciated.”

Taxes will be raised on all types of businesses. There are literally scores of tax hikes on business that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs. Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families. Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.

Who Pays

A tagline often used by individuals who advocate for higher taxes and an even more progressive tax system is “The wealthy don’t pay their fair share.” John Adams while defending the British soldiers involved in the Boston Massacre, stated “Facts are stubborn things.” Here are the facts…

Middle-class households that earned between $34,300 and $141,900 paid 50.5 percent of all federal tax revenues in 2007 (the most recent year analyzed), according to the CBO study released July 2010, and households that earned between $34,300 and $352,900 paid 66.7 percent of all federal taxes. Households in the top 1 percent for annual income (those earning more than $352,900) paid a healthy 28.1 percent of all federal taxes, but households in the lower income brackets paid relatively little. Those earning less than $34,300 paid only 5.2 percent of all federal taxes, and those earning less than $20,500 carried almost none of the federal tax burden (just 0.8 percent of the total) in 2007.

The average overall federal tax rate (including income, Social Security, Medicare, excise and other taxes) for all American households was 20.4 percent in 2007. But the average rate rose dramatically as household income rose. Households earning less than $34,300 paid an average overall federal tax rate of 10.6 percent, while households earning more than $74,700 paid an average overall federal tax rate of almost two and half times that much–25.1 percent.

When it comes to the federal income tax alone (as opposed to Social Security, Medicare, excise and other taxes) the lower income brackets actually paid a negative rate, thanks to programs such as the Earned Income Tax Credit that paid people a “credit” for income taxes they never paid. The average federal income tax rate for households earning less than $34,300, according to the CBO, was -0.4 percent in 2007, and the average federal income tax rate for households earning less than $20,500 was -6.8 percent.

Over the past three decades, according to the CBO data, taxation has been getting more progressive, as the tax burden has lightened on lower income households while increasing on higher income households. During those three decades, Presidents Ronald Reagan and George W. Bush signed laws cutting the top marginal income tax rates, but Presidents George H.W. Bush and Bill Clinton signed laws increasing the rates. The CBO divided the 116.9 million American households of 2007 into five roughly equal parts (quintiles) graded by income. The income range for the lowest quintile was $0 to $20,500; the second quintile, $20,500 to $34,300; the third quintile, $34,300 to $50,000; the fourth quintile, $50,000 to $74,700; and the fifth quintile, $74,700 and above. The share of overall federal taxes paid by each of the first four quintiles decreased from 1979 to 2007, while the share of overall federal taxes paid by the highest-income quintile increased, meaning the overall tax burden was shifting away from that class of Americans making less than $74,700 per year in 2007 toward those earning more.

Get Ready For the 1099 Nightmare

The IRS has begun planning for the influx of millions of extra tax forms intended to expose sources of underpaid taxes put into action as a part of the legislation passed in the Obamacare bill. Beginning in 2011 regulations will require businesses to file 1099 forms to all vendors that they purchased more than $600 dollars worth of goods from.

I will state that again…EVERY VENDOR THAT YOU SPEND MORE THAN $600 WITH YOU WILL HAVE TO 1099!

It is estimated that 40 million taxpayers, including 26 million sole proprietorships will be subjected to this new filing burden. It is projected that the increase in paperwork for a typical small business could sky rocket from ten 1099 filings a year to over two hundred. Many advocates fear that the ensuing flood of paperwork will put many small businesses on the ropes as larger companies try to cut back the number of vendors that they do business with.

Somehow our fearless leaders in Congress think that the IRS will be able to keep track of all this information and hunt down people not paying enough taxes. The IRS knows this isn’t possible and they have already proposed changes that will allow businesses to forgo any 1099 filing for purchases made through a credit card. I suspect that Scotch sales will go through the roof come March and April of this coming year, with accountants making up the bulk of purchases.

Divide and Conquer

I want to reiterate something that I have written about and discussed at length on my show. The tax code is where all political power comes from. Politicians wield it to give loopholes, write-offs and deals to whoever will support their agenda and send them cash.

Do you honestly think that interest deduction on your primary residence is beneficial for you?

Don’t be foolish. That was give-a-way to builders so they could charge more for homes.

What do you think tax-credits are?

We are about to subsidize an absolutely economically idiotic $41,000 automobile to the tune of $7500 per purchase. I make my car payments, now I am being told I have to help pay for some well-to-do idiot’s purchase of the Government Motors plug-in.

Politicians divide us through the tax code and use it to pick winners and losers, it needs to be done away with.

Ellis Ryan Six Months To Go Until The Largest Tax Hikes In History Americans For Tax Reform July 1, 2010

DeMause Neil IRS Starts Mopping Up Congress’s Tax-Reporting Mess CNN Money July 9, 2010

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