Between 2001 and 2003 President George W. Bush signed into law three pieces of legislation that reduced income taxes for all Americans. Those tax breaks, collectively called the Bush Tax Cuts will expire Jan. 1, 2011 unless Congress steps in to extend them or make them permanent. Otherwise, all of them will end, resulting in one of the largest tax increases in American history.
President Barack Obama wants to let the tax cuts expire for individuals earning more than $200,000 and for households making more than $250,000 (essentially raising them back to their pre-2001 level), but he wants to keep the tax breaks for those earning less than that. Obama and other democrats feel that the Bush tax cuts shifted the burden of taxes onto middle and lower income families.
Republicans and supporters of the Bush Tax Cuts want to see all of the tax breaks extended. They believe that the tax cuts helped stimulate the lagging economy after the dotcom bubble of 2000 burst and after the 9-11 terrorist attacks. They think the tax cuts will do the same for today‚Äôs lagging economy.
Black Enterprise talked to David A. Lopez, a certified public accountant and consultant and owner of David A. Lopez and Company, LLC, about what would happen if the Bush Tax Cuts expire. Here are his thoughts on the changes that would occur:
1.¬†¬†¬† There will be a change in the current tax brackets. Currently, the tax brackets are 10%, 15%, 25%, 28%, 33%, and 35%. If the current legislation expires, we anticipate the rates to increase to 15%, 28%, 31%, 36%, and 39.6%. This new law would eliminate the 10% tax bracket and all those individuals will move up to the 15% rate. Obviously, this means higher taxes for everyone.
2.¬†¬† The child tax credit that was raised to $1,000 will go back to a maximum of $500.
3.¬†¬† The capital gains tax will be increased under the sunset of the Bush Tax Cuts.¬† The maximum tax rate on long-term capital gains and qualified dividends was reduced to 15%. That will be raised to 20% on long-term capital gains, and qualified dividends will be taxed at the regular rate of the tax payer, so it could be as high as 39.6%.
4.¬†¬† We will see the return of the ‚ÄúMarriage Penalty‚ÄĚ as well. Right now, the standard deduction for married-filing jointly taxpayers is double that of a single filer; now it will be reduced.
5.¬†¬† The phase-out rule for itemized deductions will return. Simply put, the more income you earn, the fewer itemized deductions you will be able to claim.¬† The phase-out begins at $170,000 ($85,000 for married filing separate).
6.¬†¬† The phase-out rule for personal exemptions will also return. This will phase-out personal exemptions for incomes greater than $168,000 if you are single, $252,000 if you are married and filing jointly, $210,000 for head of household, and $126,000 for married filing separate taxpayers. Personal exemptions are $3,650 each; this is not scheduled to change.
Note: If the Bush Tax Cuts are extended or made permanent, without any changes, none of these things will happen.
For a more in depth look at how the tax cuts could affect the economy if they expire, are extended partially, or extended in their entirety visit: