your quick tax education

This post has nothing to do w/ me personally, my adventures of awesomeness, my kick-ass NFL gambling record (68% in case you're curious), the best holiday ever (a.k.a Halloween), or my upcoming trip to Vegas.  None of it.  This post will educate my friends and family members about what could possibly happen w/ your taxes for 2011 (April 2012 filing) barring any shocking legislation from Congress.

Most of you have probably heard the term "Bush Tax Cuts."  This comes from 2001 and 2003 tax laws that lowered taxes for all Americans and took the capital gains and dividend tax rates down to 15% (and 0% in some people's cases).  Capital gains for most people come into play on stock sales/gains.  The top tax rate was lowered from 39.6% to 35%.  A 10% bracket was installed.  The current tax rate system progresses as follows - 10%, 15%, 25%, 28%, 33%, 35%.  As you  make more money, you progress into a higher rate.  For example, the 10% bracket for a married couple is used on your first $16k of income, then 15% rate is used on income between $16k & $68k, and so forth.  These rates benefit all US taxpayers. 

In addition to the lower tax rates, the Bush Tax Cuts also installed various deductions and increased tax credits for people, most notably the increased Child Tax Credit from $500 up to $1,000.  These credits are straight reductions of your tax liability and typically increase your refund.  Most middle class families get a benefit for these child tax credits (they get phased out at approximately $150-160k of gross income).  So for the majority of American families, these credits decrease the amount they owe or increase their refund.  There are numerous other deductions and credits that the Bush Tax Cuts increased or extended that for the most part apply to 90% of American taxpayers (excluding the wealthy mainly because they get phased out due to income limitations).

The Bush Tax Cuts also increased the estate tax exemptions amounts, saving normal families millions of dollars in estate tax. 

Now, fast forward - these cuts expire at the end of 2010.  If Congress does nothing, the Bush Tax Cuts go away and everything reverts to what it was pre-Bush Tax Cuts.  Most of you have probably heard some of this in the media and how Obama wants to essentially eliminate these cuts.  Without getting into too many details, the basic way this is spun to the public is that the lower 15% capital gains rate will go away for people who make more than $250k.  The "tax argument" is being spun to be a rich vs poor argument.  Tax the rich more since they make more $$$ - i get it, it makes sense and does have validity, but THERE IS A HUGE PIECE YOU AREN'T BEING TOLD.   You don't know what you don't know and this is why many people are going to be in for a rude awakening in the winter/spring 2012 when they file their 2011 taxes and see that their typical refunds have been slashed in half or have disappeared all together.   Bear w/ me now.....

If Congress does absolutely nothing or they only extend the capital gains 15% rate for people under $250k, the Obama administration is going to spin it as "See, we are raising taxes on the rich."  However, what you are not being told is that the tax bracket rates for all Americans is going to raise. 

That 10% rate bracket - GONE.  The lowest rate will be 15%.  So you're already missing out on a 5% savings for the first $16k of income (or $800 is what your refund will shrink by) Next rate will be 28% - no 25% rate, so another 3% increase.  Oh, and those lovely $1,000 child tax credits for kids under the age of 16, those will decrease to $500/kid. 

Let's say we have a young married couple - husband makes $50k and wife works part-time and is still in school.  They also have a kid.  Their refund is going to shrink from say $2,000 to maybe $700.  A $1,300 difference!  For a young family that only makes $50k annually, $1,300 decrease in cash flow is a fairly big deal.  (This example is hypothetical and there are many other factors that could come into play here, but you get the picture)

Here's the point - don't be fooled when you hear that taxes are only going to go up for the rich.  The message you aren't hearing is that credits and deductions are going to be reduced/eliminated as well as tax rate brackets may disappear....   Deductions being slashed and credits being reduced is also known as "A TAX INCREASE," but again, that message isn't being portrayed.  Everyone's taxes are going to go up, but portraying that message doesn't win Presidential elections.  The stimulus & health care reform packages have to be paid from somewhere and the the rich already pay 90% of this country's taxes. 

There has been recent rumors surrounding what Congress may or may not do, and w/ the recent election, who knows what will happen.  It's possible they could extend the Bush Tax Cuts for another few years, which would postpone the scenario outlined above.  I'm not even going to get into that here - way to many variables there. 

If you liked this post, let me know and I can try to provide more similar to this into my blog routine.  With the end of the year approaching and the House being turned back over to the Republicans, we could be in for some interesting tax legislation in the next few months - or absolutely no activity at all because Congress won't be able to come to an agreement on anything.

BC