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July 02, 2010 11:08 PM UTC

The Largest Tax Hikes in History- 1/1/2011

  • by: NEWSMAN

Six Months to Go Until

The Largest Tax Hikes in History

Ryan Ellis  Thursday, July 1, 2010

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 GOP 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.  

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.…


19 thoughts on “The Largest Tax Hikes in History- 1/1/2011

  1. we could keep on passing the bill for our misguided nation building to our children’s children like the previous administration favored.

    I have no faith in your numbers but I like the general idea that instead of pretending that the cost of wars don’t on the budget, we might actually be paying instead of borrowing for our expenses.

  2. Those tax rates were all in place during the ’90’s when we were running surplus after surplus.

    Of course, we weren’t fighting two major wars, and unemployment was about 5%.

    Gee, maybe we should boost spending on R&D and infrastructure, and let a booming economy reduce the deficit rather than shutting down the economy by turning off the flow of money?

    1. two rates

      15% and 28%.

      No personal interest deductions except for your personal residence.

      15% Capitol Gains and Dividends.

      Eliminate double taxation, death taxes, and the alternative minimum tax.

      1. and for a reason. they prevent the creation of a superclass of Americans who have done absolutely nothing to deserve their high status other than to choose their parents and grandparents wisely.

        And you would already have to be extremely, extremely wealthy by any reasonable standard to pay them anyway as they don’t apply to estates under a million dollars after January 1st 2011, but even that may be increased by legislation to five million.

        1. be broken up or sold off at the death of the founder simply because you don’t think it is fair for him to pass on the fruits of his labor to his posterity.

      2. …but becomes yours due to inheritance, then the money comes to you, or is income to you.  I argue that it should be taxed as income.  Same rules for all money that becomes yours through wages, inheritance, dividend, etc.  Eliminate the regulative complexity.

      3. That, of course, means that I don’t have to pay FICA and income taxes on the same amount, right?  Everything paid on FICA taxes should be deducted from income before any other adjustments, correct?

        And, I’m in favor of eliminating any taxes we can afford.  If it can’t be offset, the tax should stay at the higher level.

        1. and just spent 5 minutes looking for it. Still getting to know the site but could have sworn NEWSMAN had posted a diary BLASTING Democrats for killing SA 3644 which was introduced by Orrin Hatch that would have exempted veterans from paying a tax on prosthetic limbs I think. Hatch proposed this amendment as part of the Republicans plan to stall or kill health care reform by throwing up a bunch of amendments hoping just one would pass, sending reform back to the House.

          NEWSMAN failed to mention ANY of this in his diary, nor did he mention that the exemption was added AFTER the initial health care reform legislation was signed into law. He simply stated that Hatch’s SA 3644 was voted down in the Senate by Democrats. He was either ignorant and too lazy to research before posting or he was really counting on everyone else being ignorant and lazy.

          Ouiser – Is that the Diary you were referring to?

            1. I asked what the poster was referring to, and that is a lie?

              I don’t recall the diary mentioned, could you post a copy so we can discuss it, or do you just want to throw out insults?

  3. Rather than ATR nonsense, that is.

    Start with the tax bracket facts:

    First, the 10% tax rate is proposed as a permanent change under the current Obama budget plan – it won’t be going away.  

    Second, the 25 and 28% brackets will remain in place.

    Only the top two brackets will revert to their pre-Bush levels, which are still significantly lower than any other time since before the Depression set in.

    Now on to farm estates:

    Very few farms would be affected by an estate tax, and there is not a single documented case of a farm ever having been sold off to meet estate tax obligations.  The exemption for farms is $3.5m for a single person, or $7m for a couple (2009 law), and the land is valued at a reduced amount for farms.

    1. First, the 10% tax rate is proposed as a permanent change under the current Obama budget plan – it won’t be going away.

      BULL.  It WILL expire and will GO AWAY.  Just because a politician has proposed to revive or extend it, right now that is just talk and HAS NOT happened yet.  

      When it is passed in the house and Senate and signed by the president, then it will happen, and not until then.

      The quote in my diary is accurate !

      1. No formal bill has been submitted yet for 2011 taxes.  But the White House budget proposal matches or comes close to what House Democrats have been talking about; the Senate won’t take it up until after the House passes it, being a budget item.  But you would have to be a complete nut to oppose extending the middle-class and lower-class tax cuts; these will be extended unless Republicans want to risk their political hides trying to block the extension.

        And you failed to rebut my points on the Farm Estate Tax, which is the law as it stands.

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