A slew of tax cuts are set expire in less than six months, unless Congress acts to extend them. With the government starved for revenue and the national debt topping $13 trillion, Washington watchers are speculating over which tax breaks lawmakers will choose to extend.
The year 2011 probably seemed like it was far in the future back when the George W. Bush administration got its tax-cut packages passed in 2001 and 2003. But the future is almost upon us, and those tax cuts are set to expire at the end of the year unless Congress acts to restore them.
What critics described at the time as “tax cuts for the rich” actually lowered taxes across the whole income spectrum, which means that virtually all taxpayers would feel the tax-increase pain if all of the Bush tax cuts are allowed to expire. Taxpayers in the lowest tax bracket, for example, would be bumped from 10 percent to 15 percent and similar increases will be felt all the way up the income ladder to the top tax rate, which would jump from 35 percent to 39.6 percent.
President Obama has said that he would allow certain tax cuts to expire for individual taxpayers who earn more than $200,000 and couples who make more than $250,000. But the president has maintained since his candidacy that he won't raise taxes on middle- and lower-income individuals. Still, with the federal government starved for revenue -- and the U.S. national debt now topping $13 trillion -- Washington watchers are debating whether lawmakers will agree.
Other taxes are expected to rise: The tax on long-term capital gains, now at 15 percent, is expected to rise to 20 percent, while the tax on dividends could be as high as 39.6 percent, up from the current 15 percent, when the tax cut expires at the end of the year. President Obama has said he favors a 20 percent cap on dividends, but, again, whether Congress will concur remains to be seen.
The so-called “stealth taxes,” caused by phase-outs of personal exemptions and itemized deductions for upper-income taxpayers, would also return when the tax breaks expire. The estate tax, which disappeared this year, is expected to make a comeback in 2011, with an exemption of $1 million and a top tax rate of 55 percent. (In 2009, the estate tax levied a 45 percent tax on assets over $3.5 million.)
Tax planners are careful to note that much of this scenario may change, depending on how Congress acts. So far, Democrats have pledged to shield middle-class and lower-income taxpayers from the increases, but how that will look in practice is still an unknown. For answers to frequently asked questions about the issue, visit the Tax Foundation’s website.