Q: Will "the largest tax hikes in the history of America" take effect next year? Will ordinary taxpayers see taxes "skyrocket"?
A:
That’s not likely. A scary e-mail lists "Tax hikes in 2011" that
probably won’t take effect, or won’t apply to families making under
$250,000 a year. One "tax hike" is pure fiction.
FULL QUESTION
Hello, I’m forwarding an e-mail apparently from the conservative
bureau of misinformation. My friend who forwarded it isn’t very up on
the news and politics and was scared to death that her tax will
skyrocket next year… even though she makes way less than $250,000.
Thanks for all the great works you guys and gals do!
Subject:Tax Hikes in 2011
In just six months, the largest tax hikes in the history of America
will take effect. They will hit families and small businesses in three
great waves on January 1, 2011:
First Wave: Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, the 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. ⬐ Click to expand/collapse the full text ⬏
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.
Second Wave: 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 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 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.
Third Wave: 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, 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.
PDF Version Read more: http://www.atr.org/six-months-untilbr-largest-tax-hikes-a5171#%23ixzz0sY8waPq1
Now your insurance is INCOME on your W2’s……
One of the surprises we’ll find come
next year, is what follows - - a little "surprise" that 99% of us had
no idea was included in the "new and improved" healthcare legislation .
. . the dupes, er, dopes, who backed this administration will be
astonished!
Starting in 2011, (next year folks),
your W-2 tax form sent by your employer will be increased to show the
value of whatever health insurance you are given by the company. It does
not matter if that’s a private concern or governmental body of some
sort. If you’re retired? So what; your gross will go up by the amount
of insurance you get.
You will be required to pay taxes on
a large sum of money that you have never seen. Take your tax form you
just finished and see what $15,000 or $20,000 additional gross does to
your tax debt. That’s what you’ll pay next year. For many, it also
puts you into a new higher bracket so it’s even worse.
This is how the government is going
to buy insurance for the15% that don’t have insurance and it’s only part
of the tax increases.
Not believing this??? Here is a research of the summaries…..
On page 25 of 29: TITLE IX REVENUE
PROVISIONS- SUBTITLE A: REVENUE OFFSET PROVISIONS-(sec. 9001, as
modified by sec. 10901) Sec.9002 "requires employers to include in the
W-2 form of each employee the aggregate cost of applicable employer
sponsored group health coverage that is excludable from the employees
gross income."
Joan Pryde is the senior tax editor
for the Kiplinger letters. Go to Kiplingers and read about 13 tax
changes that could affect you. Number 3 is what is above.
Why am I sending you this? The same reason I hope you forward this to every single person in your address book.
People have the right to know the truth because an election is coming in November.
FULL ANSWER
We’ve been flooded with inquiries about various versions of this
chain e-mail, which has been circulating since July. It grafts together a
set of misleading claims issued by the conservative Americans for Tax
Reform with a fictional claim about taxation on health insurance
benefits.
The W-2 Fiction, Again
Let’s dispose of the bogus health insurance claim first. It’s not
true that "you will be required to pay taxes" on the value of
employer-paid health insurance benefits. This is a falsehood that
circulated earlier as a separate chain e-mail. See our May 22 article, "
Health Care Law and W-2 Forms," for full details.
It’s true that the new health care law requires employers to report
the value of health insurance benefits on W-2 forms starting next year,
but that’s for informational purposes only.
The remainder of the chain e-mail message contains misleading claims
about what "will" happen next year that were copied and pasted — nearly
word for word — from an
Americans for Tax Reform document
dated July 1. (The garish colors were added by the anonymous author of
the e-mail message.) For the most part, these are "hikes" that the
president and Democratic leaders in Congress have long said they won’t
allow to take effect, except for individuals making more than $200,000 a
year, or couples jointly making more than $250,000.
Bush Tax Cuts: Mostly Slated for Extension
Both the e-mail and the ATR document claim
that all the tax cuts enacted in 2001 and 2003 and signed by President
Bush "will all expire on January 1, 2011." Actually, that’s not what’s
expected to happen at all. It’s true that the cuts are scheduled to expire, but they will expire only if Democrats who control the White House and Congress fail to do what they’ve promised.
Particularly misleading are the claims that
"[t]he child tax credit will be cut in half from $1000 to $500 per
child" and that "marriage penalty" relief will expire. As veteran
congressional reporter David Rogers, who writes for Politico, put it
back in July: What Democrats are debating is not whether, but
"when — and for how long" to extend the Bush tax cuts that apply to lower and middle-income taxpayers.
‘Death Tax’: Only on Multimillion-Dollar Estates
The message is also misleading in what it
says about the temporary repeal of the federal estate tax — which
Republicans like to call the "death tax." Under terms in the Bush tax
cuts, the estate tax was phased down over several years and eliminated
entirely for those who die in 2010, but it’s set to return in 2011 at
levels that prevailed before 2001. So just as the message says, for
those dying after Jan. 1 next year, estates of more that $1 million
would be subject to taxation at rates as high as 55 percent on amounts
over that threshold. But that will happen only if Congress fails to act,
and there’s little sentiment in Congress, even among Democrats, for
allowing that to happen.
In the Senate, several Democrats want to
bring back the estate tax with an even higher exemption and a lower
rate. In April 2009, the Senate adopted
an amendment
to a budget bill that would have set as a target a $5 million exemption
($10 million for couples) and a top rate of 35 percent. The bipartisan
amendment was sponsored by Democratic Sen. Blanche Lincoln of Arkansas
and Republican Sen. Jon Kyl of Arizona. It
passed with 51 votes in favor — 10 of them from Democrats,
even though the Senate’s Democratic leadership (and President Obama)
had set $3.5 million as a target. The Senate amendment wasn’t accepted
by the House, which insisted on keeping the $3.5 million threshhold in
the budget bill. With its Democrats divided, the Senate ultimately
failed to act on the estate tax, allowing it to expire entirely for
2010.
So Congress has yet to agree on whether to
bring back the estate tax only for estates worth more than $3.5 million,
or only for those over $5 million. Few if any voice support for
bringing it back for estates of more than $1 million. That could happen
if the deadlock on this issue continues (again, always a possibility).
But majorities in the House and Senate have voted to impose the
so-called "death tax" only on multimillionaires.
A ‘Wave’ of ‘Obamacare’ Taxes?
The e-mail describes a "second wave" of tax
increases that it says will take effect Jan. 1 under the new health
care law. But this "wave" consists of three relatively minor tax changes
that affect relatively few people.
- What the e-mail describes as a "Medicine cabinet tax" simply aligns
rules governing health savings accounts (HSAs), Flexible Spending
Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs) with
the tax rules that apply to deducting medical expenses generally. Under
current law, taxpayers in general are not allowed to deduct the cost of
non-prescription drugs as a medical expense. The only exception is for
insulin. But those with HSAs, FSAs and HRAs were
allowed to use pre-tax dollars to buy aspirin, over-the-counter cold
and allergy medications, and other drugs available without a doctor’s
prescription. The new "tax" simply says HSAs, FSAs and HRAs can’t be
used to buy these medications — except for insulin — after December 31.
(See pages 69 and 70 of the Joint Committee on Taxation’s "technical
explanation" of the revenue measures in the new health care law, which
can be downloaded from the committee’s website. This will affect a small proportion of taxpayers. For example, the health insurance industry says 10 million persons were covered by HSAs as of January of this year, roughly 3.2 percent of the population.
For that relatively small group, the change does amount to a tax
increase. It will bring in a total of $5 billion over the next 10 years,
the JCT estimated in its "Estimated Revenue Effects" of the new law.
- The "HSA withdrawal tax hike" refers to a doubling of the current 10
percent penalty that must be paid on any HSA funds spent for something
that’s not a qualified medical expenditure. (See pages 71 to 73 of the JCT technical explanation.) The JCT expects that to bring in $1.4 billion over 10 years.
- The "special needs kids tax" refers to a cap of $2,500 that the new law places on spending from FSAs. (See pages 74 to 77 of JCT’s technical explanation.)
The argument made in the e-mail is that "many" families with special
needs children now use FSAs to pay tuition at private schools catering
to special needs children, schools that ATR says "can easily exceed
$14,000 per year" in Washington, D.C. Perhaps so. IRS rules do allow use
of FSA funds to pay for such expenses with pre-tax dollars. But the
e-mail message offers no evidence of how many families might be taking
advantage of this tax break currently. The claim is copied from the
website of Americans for Tax Reform, but as ATR itself says: "For
most people, the $2500 cap won’t be noticed." As ATR concedes, FSAs
"tend to be used for things like small deductibles, co-payments,
eyeglasses, over-the-counter medicines, and laser eye surgery." The
amount deferred in the typical FSA is probably much less than $2500
today, ATR says. The JCT expects the change will bring in $13 billion over 10 years, but says nothing about how much of that is likely to come from the pockets of parents of special needs children.
We don’t argue for or against any of these three tax increases. We
simply point out that, even taken together, they amount to less than $2
billion per year and, therefore, don’t constitute anything close to a
"wave" of historically large tax increases taking effect next year.
Alternative Minimum Tax
The message flatly claims that the
Alternative Minimum Tax will suddenly "ensnare over 28 million
families," forcing them all to pay higher taxes. But historically,
Congress has repeatedly refused to allow that to happen.
The
AMT
was originally enacted in 1969 to cover a few very high-income
individuals, but it was not indexed for inflation. So it has come to be a
headache for several million taxpayers, and would hit even more if
Congress had not enacted
a series of "patches" each year since 2001.
The
Tax Policy Center calculates
that next year 28.5 million taxpayers would have to pay higher taxes on
their 2010 returns if the usual patch is not extended. But Obama’s
stimulus bill extended the patch through 2009, holding down the number
of taxpayers affected to just 4 million. And there’s no reason to think
that Congress will fail to extend the patch for 2010 taxes. In fact,
President
Obama’s budget assumes that a permanent fix will be enacted, holding the AMT to levels in place for 2009. That’s something President Bush never proposed.
Tax Extenders
The message goes on to claim that
businesses will lose a host of tax benefits, including a research tax
credit; that teachers will no longer be allowed to deduct classroom
expenses (high-school and grade-school educators can now deduct
up to $250 a year);
and that persons with Individual Retirement Accounts will no longer be
able to use them to make charitable donations. But these are tax
provisions that have been routinely renewed in the past, and Congress
has strongly signaled that it intends to renew them for 2011 as well.
The fact is that on Dec. 9 last year,
the House voted 241 to 181 to approve the "
Tax Extenders Act of 2009."
That bill called for extending for one more year a long list of
expiring tax breaks, including the business research tax credit (Section
111, page 6), the $250 deduction for teachers buying classroom
supplies (Section 104, page 6), and tax-free distributions from
individual retirement plans for charitable donations (Section 135, page
14).
–Brooks Jackson
SOURCES
U.S. Senate 111th Congress - 1st Session.
Vote #146. 15 Jan 2009.
"
2011 Budget Tax Proposals; Index 2009 parameters of the AMT to inflation." Tax Policy Center. Undated Web page, accessed 3 Sep 2010.
U.S. House of Representatives 111th Congress - 1st Session.
Vote #943. 9 Dec 2009.
111th Congress - 1st Session;
H.R. 4213 "Tax Extenders Act of 2009" (As approved by the House). 9 Dec 2010.
U.S. Senate 111th Congress - 2nd Session.
Vote #48 10 Mar 2010.
111th Congress - 1st Session;
H.R. 4213 "Tax Extenders Act of 2009" (As approved by the Senate). 10 Mar 2010.
