Unless Congress takes action, it’s not just the “rich” who will see higher tax bills
The so-called Bush tax cuts are scheduled to expire at the end of this year. While you may already know that, you may not fully understand what’s in store for you and your family. Here’s what to expect.
Higher Tax Rates for All
You may think only individuals in the top two brackets will face higher federal income taxes if the Bush cuts go bye-bye as scheduled on Jan. 1, 2013. Not true. Unless Congress takes action and the president goes along (whoever that is), rates will go up for everyone–not just “the rich.” Specifically, the existing 10% bracket will go away, and the lowest “new” bracket will be 15%. The existing 25% bracket will be replaced by the “new” 28% bracket; the existing 28% bracket will be replaced by the new 31% bracket; the existing 33% bracket will be replaced by the 36% bracket; and the existing 35% bracket will be replaced by the 39.6% bracket.
Bottom line: We’ll all see higher taxes.
Higher Capital Gains and Dividends Taxes for All
Right now, the maximum federal rate on long-term capital gains and dividends is only 15%. Starting next year, the maximum rate on long-term gains is scheduled to increase to 20% (or 18% on gains from assets acquired after Dec. 31, 2000, and held for over five years), and the maximum rate on dividends will skyrocket to a whopping 39.6%. Right now, an unbeatable 0% rate applies to long-term gains and dividends collected by folks in lowest two rate brackets of 10% and 15%. Starting next year, folks in the lowest two brackets will pay 10% on long-term gains (or 8% on gains from assets acquired after Dec. 31, 2000, and held for over five years) and 15% and 28% on dividends (compared to 0% now).
Bottom line: taxes on long-term gains and dividends will go up for everyone.
Harsher Marriage Penalty
The Bush tax cuts included several provisions to ease the so-called marriage penalty. The penalty can cause a married couple to pay more in taxes than when they were single, which is nuts. Right now, the bottom two tax brackets for married joint-filing couples are exactly twice as wide as for singles. This helps keep the marriage penalty from biting lower and middle-income couples. Starting next year, the joint-filer tax brackets will contract, causing higher tax bills for many folks. Currently, the standard deduction for married joint-filing couples is double the amount for singles. Starting next year, the joint-filer standard deduction will fall back to about 167% of the amount for singles.
Bottom line: lots of lower and middle-income couples will face higher tax bills due to a harsher marriage penalty.
Edited remarks of Eugene Bushman.
Evan S. Russell, CFP®, Stacy L. Rerick, CFP®, Ronald E. Wilkinson, CFP®