Sep 06 2010
Note of Apology
In response to the criticism in the comments I wish to extend my apologies for any partisanship that came through in my article. I attempted to address the facts and their presentation in the viral email and to point out that these new taxes are not realistically a given considering the (in)action that Congress would have to take for some of them to come into effect. This is something that is not stated in the email itself and supporting documentation is provided.
MOAA is apolitical by law and by nature, and this blog was created by the Member Service Center to address the many viral emails that we encounter daily. Instead of responding to each one individually, we started it to have a reference point to refer members to. It in no way takes time away from our legislative team’s actions nor does it affect our mission or goals, which are clearly laid out on MOAA’s Legislative Action Center. This is for informational and discussion purposes only and should not be seen as an extension of MOAA’s core principles and goals.
I can certainly understand the sentiment expressed, especially by Colonel James Rogers, that wishful thinking and predictions of Congressional action can be seen as partisan. It was not meant to be a support of any group, but an attempt to address specific items in the email.
Death, Taxes and Distortions
Probably the most distributed email for the past month has been a scare message that talks about what would be the largest tax hike in history starting in January 2011. While the intent of the email is to tie in the increases in taxes and changes in law directly to President Obama’s ‘redistribution of income’ scheme and some of the items in the email are directly related to President Obama’s health care bill, there are several items that should be of concern to citizens. The partisan language at the conclusion of the email is not warranted, and the assertion that this is an attempt to force America to ‘Soviet style Socialism and then Communism’ is simply a scare tactic. So let’s drop the partisanship and examine the particular items.
We sat down with our resident MOAA financial expert, Phil Dyer, CFP, and went over the list item by item. Our thoughts follow the full text of the email.
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.
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. Abortions are covered by Obamacare.
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.
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 Obama 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; increased taxes are a way to accomplish what Obama said he wanted for the United States, “redistribution of income”. Ask yourself, “is he accomplishing this in partnership with Congress?
The consequences of these Congress legislative actions will be a continued deep-recession, even a possible depression. This will open the door for Soviet style Socialism and then Communism. People have the right to know the truth because an election is coming in November.
‘Wave 1′ Analysis
What is labeled as ‘Wave 1′ here are primarily related to the Bush tax cuts that were written and passed in 2001 and 2003 set to expire on January 1st, 2011. These changes would become the regulations and terms only if Congress did not act to extend the cuts. Currently the discussion is not if they should be extended, but for which groups and whether or not it should be extended for everyone. There is very little in the way of chatter that would indicate that no action will be taken prior to the end of this term.
Regarding the rises in tax brackets, which should really be described as a return to the previous states, this item leaves out a huge point. While the email states that these changes will happen starting on January 1, 2011, it is extremely unlikely that the tax brackets will not be extended, especially for anyone making under less than $200k annually or $250k for families filing jointly.
The return of the ‘Marriage Penalty’ and a 50% reduction of the child tax credit. This would be something that would hit the most American families directly and, by our estimations, has about as much chance of expiring as the Rams have of winning the Super Bowl this year.
The ‘Death Tax’ return is a concern and has a high probability of coming back in some incarnation, but it is extremely unlikely that the rate will be for estates worth over $1 million. The House passed a bill in 2009 that would make the top rate 45% and only applicable to estates worth $3.5 million and newer Senate figures are talking about 35% top rates for estates over $5 million. The Senate measure failed, and the estate tax expired in 2010 as it was written to in the tax cuts of the early 2000s. The most probable solution, barring an irreconcilable procedure debate (which we all know happens far too much), is that the $3.5 million 2009 level will return, affecting a small portion of the populace.
The capital gains tax rises from 15 to 20% in 2011 and will most likely increase in 2013. If there is another part of the Bush tax cuts that need an extension, here it is. Capital gains and dividends tax increases are brutal on small businesses and, in a jobless recovery, anything that will end up being a ‘job killer’ is likely to be addressed. Take this item to heart as it would have a large impact on investments and hiring should they expire.
‘Wave 2′ Analysis
Each of the three items listed in section 2 are represented in the email fairly accurately in terms of cost and impact with a few exceptions. It lists three changes to law that could hardly be considered a historic wave of new taxes, it affects a much smaller portion of the populace than the email implies, and the final line of item 2, ‘Abortions are covered by Obamacare’, makes no mention of the tight restrictions on when and under what conditions abortions are covered by federal funding.
The most controversial of the items is number 2, the “Special Needs Kids Tax”. For this, I refer you to FactCheck’s summary:
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 [Americans for Tax Reform] 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 [Joint Commission on Taxation] 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.
‘Wave 3′ Analysis
The items in wave three are mostly concerned with the annual debate Congress and the White House have over extending the Alternative Minimum Tax (AMT). Like the Bush tax cuts, this would only be an issue if Congress failed to enact an extension to the yearly fix that ensures that the number of families affected remains low. In 2009 the AMT band aid was passed and there are no strong indications from Congress that this will not happen again. Eventually, the law will have to be fixed and adjusted for inflation, but the budget presented by President Obama for 2011 actually assumes an extension of the fix to keep the AMT at 2009 levels and factors that in to the equation.
The most concerning item in section 3 is the small business expense reductions and research and experimentation tax credits. Although the ‘literally scores of tax hikes’ are mostly obscure, if Congress fails to extend the tax credits we’ll have another case of possible job killing changes. Again, this is another case of ‘if Congress does nothing’, and if the Tax Extenders Act of 2009 is any indication, the fate of the increases are, at worst, still up in the air, and at best, an almost sure-to-pass group. Especially in a hot mid term election year, we expect Congress to ensure that these changes don’t come into effect.
The provisions that company-provided insurance will be required to be listed on your W-2′s as income leave out the most crucial part of that provision – that the amount is not taxable and does not factor into your tax brackets. It is an add-on to the email of a previous viral scaremail that we discussed in May and June. While an argument could be made that this sets the stage for a slippery slope trending towards inclusion of employee provided health care costs, it would be a purely hypothetical one.
The ending of the email is more of the same that we’ve seen before, with the keywords thrown in there for good measure. Politics and obstructionism will play their roles in the coming months, and we will all have to watch closely to make sure that this email turns out to be dismissible come 2011.
Note: As pointed out by an observant reader, the $100,000 IRA charitable contribution amount expired at the end of 2009. A falsehood that we did not cover initially. You can still of course contribute from your IRA to charitable foundations, but the amount you send will be added to your Adjusted Gross Income and negatively affect your tax return. For more information, see the following article from Getting Your Financial Ducks In A Row: click here.
The New York Times is reporting that President Obama is against any compromise that would allow the top 2% of earners an extension on the Bush tax cuts:
It is not clear that Mr. Obama can prevail given his own diminished popularity, the tepid economic recovery and the divisions within his party. But by proposing to extend the rates for the 98 percent of households with income below $250,000 for couples and $200,000 for individuals — and insisting that federal income tax rates in 2011 go back to their pre-2001 levels for income above those cutoffs — he intends to cast the issue as a choice between supporting the middle class or giving breaks to the wealthy.
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