Referred to as the “Bush Tax Cuts,” many current tax provisions are planned to expire at the end of 2012. A large majority of these tax cuts were enacted in 2001 and 2003 (some actually coming in the Obama Administration) with most having a LARGE impact on families and business owners. If the current tax cuts are allowed to expire by congress then the increased taxes in federal income and self employment taxes will be astounding. With the current election just around the corner everyone needs to be aware of the changes and the impact these tax provisions will have on their personal finances. CNBC and other financial media outlets have referred to the current state as a “Fiscal Cliff” as the amount of increased taxes is estimated at $600 billion.
Obama states that he supports the increased taxes through the current Alternative Minimum Tax cap, estate tax, gift tax, generational skipping tax, and the top individual income tax rate. The Romney or Republican Plan desires for the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) and the American Opportunity Tax Credit (AOTC) to expire while maintaining all other tax revisions.
There are numerous other tax revisions that neither party has discussed so depending on who wins the election the actual changes are anyone’s guess. Just a few of these tax provisions are educational tax benefits, dependent care deductions, tax rates on personal gains, adoption and child tax credits, charitable giving deductions, green energy credits, and disaster relief credits.
For this article I will summarize the major provisions set to expire. All information comes from the Congressional Research Service report produced and submitted to Congress. It can be found here.
Below is a table showing the current married filing jointly tax brackets and how they would change if our government decides to step/fall off the “Fiscal Cliff”.
Note that determining one’s federal tax rate involves using a cumulative calculation method. In-other-words a family having a taxable income of $70,000 will not be taxed at a single rate of 28%. They instead pay 10% on the first $17,400, then 15% up to $59,000 and then 28% on the remaining income. With the expiration of the current tax rates the family’s total tax burden would increase by $2300. (To better understand how your income tax rate is calculated visit MoneyChimp. They have a great visual calculator!)
In addition to the change in tax brackets, the marriage penalty would resume. As shown in the table above the standard deduction for married filing jointly would decrease by just under $2000. In addition the range of incomes for the 15% tax brackets would decrease. The upper range of the 15% tax bracket would drop to $49,265 from the current $59,000. This change results in approximately $10,000 being taxed at 28% (an additional $1300 tax burden).
Lastly, the table below shows some additional major provisions set to expire. The educational tax assistance, student loan interest deductions, estate taxes, payroll taxes, sales taxes, foreclosure exemptions, and energy efficiency credits will impact a large majority of Americans. For additional credits including the AMT adjustments mentioned by both Romney and Obama please visit the report using the link provided above.