Subject: Upcoming changes to your taxes.
In less than six months, the largest tax hikes in the history of
America will begin to take effect. They will hit individuals,
families and small businesses in several stages beginning on January
1, 2011. There is a certainty that something here will directly
effect you. I have been gathering this information from several
sources and, in an attempt to summarize it all in the first section,
have duplicated some of the items. Please bear with me and I am sure
you will find at least something here of interest.
Stage 1: Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, the Congress enacted several tax cuts for investors,
small business owners, and families. These will all expire on January
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.
Stage 2: "Obamacare"
There are over twenty new or higher taxes in Obamacare. Several will
first go into effect on January 1, 2011. They include:
The Tanning Tax. This went into effect on July 1st of this year. It
imposes a new, 10% excise tax on getting a tan at a tanning salon.
There is no exemption for tanners making less than $250,000 per year.
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 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.
Brand Name Drug Tax. Starting next year, there will be a multi-
billion dollar tax assessment imposed on name-brand drug
manufacturers. This tax, like all excise taxes, will raise the price
of medicines, hurting everyone.
Economic Substance Doctrine. The IRS is now empowered to disallow
perfectly-legal tax deductions and maneuvers merely because it judges
that the deduction or action lacks “economic substance.” This is
obviously an arbitrary empowerment of IRS agents.
Employer Reporting of Health Insurance Costs on a W-2. This will
start for W-2s in the 2011 tax year. While not a direct tax increase
in itself, it makes it very easy for Congress to tax employer-provided
healthcare benefits later. It is not yet clear whether this will be
reported as additional taxable income. It probably will not be taxed
the next year, but unofficial buzz leans toward this as a future
More details on these items follow.
Stage 3: The Alternative Minimum Tax and Employer Tax Hikes
When many Americans prepare to file their tax returns in January of
2011, they’ll be in for a nasty surprise. Few taxpayers even know
what the AMT is because it has previously not applied to them. Many
tax relief provisions will have expired. These major items include:
The AMT will ensnare over 28 million families, way up from 4 million
last year. (According to the "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 high-
imcome taxpayers. It will now effect a great many taxpayers who are
certainly not "high-income."
Small business asset 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
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.
New Health Law Raises Taxes on Working Families By Over $500 Billion.
Individual Mandate Excise Tax (Jan 2014): Starting in 2014, anyone not
buying “qualifying” health insurance must pay an income surtax
according to the higher of the following:
1 Adult: 1% AGI/$95
2 Adults: 1% AGI/$190
3+ Adults: 1% AGI/$285
1 Adult: 2% AGI/$325
2 Adults: 2% AGI/$650
3+ Adults: 2% AGI/$975
1 Adult: 2.5% AGI/$695
2 Adults: 2% AGI/$1390
3+ Adults: 2.5% AGI/$2085
Exemptions may be available for religious objectors, undocumented
immigrants (!), prisoners, those earning less than the poverty line,
members of Indian tribes, and hardship cases (determined by HHS), but
will likely trigger IRS audits.
Employer Mandate Tax (Jan 2014): If an employer does not offer health
coverage, and at least one employee qualifies for a health tax credit,
the employer must pay an additional non-deductible tax of $2000 for
all full-time employees. Applies to all employers with 50 or more
employees. If any employee actually receives coverage through the
exchange, the penalty on the employer for that employee rises to
$3000. If the employer requires a waiting period to enroll in coverage
of 30-60 days, there is a $400 tax per employee ($600 if the period is
60 days or longer). This is potentially very big trouble.
Combined score of individual and employer mandate tax penalty: $65
Surtax on Investment Income ($123 billion/Jan. 2013): Creation of a
new, 3.8 percent surtax on investment income earned in households
making at least $250,000 ($200,000 single). This would result in the
following top tax rates on investment income:
Capital Gains, Dividends, Other*
2010: 15%,15%, 35%
2011-2012 (current law): 20%, 39.6%, 39.6%
2011-2012 (Obama budget): 20%, 20%, 39.6%
2013+ (current law): 23.8%, 43.4%, 43.4%
2013+ (Obama budget): 23.8%, 23.8%, 43.4%
*Other unearned income includes (for surtax purposes) gross income
from interest, annuities, royalties, net rents, and passive income in
partnerships and Subchapter-S corporations. It does not include
municipal bond interest or life insurance proceeds, since those do not
add to gross income. It does not include active trade or business
income, fair market value sales of ownership in pass-through entities,
or distributions from retirement plans. The 3.8% surtax does not
apply to non-resident aliens.
Excise Tax on Comprehensive Health Insurance Plans ($32 bil/Jan 2018):
Starting in 2018, new 40 percent excise tax on “Cadillac” health
insurance plans ($10,200 single/$27,500 family). Higher threshold
($11,500 single/$29,450 family) for early retirees and high-risk
professions. CPI +1 percentage point indexed.
Hike in Medicare Payroll Tax ($86.8 bil/Jan 2013): Current law and
First $200,000 ($250,000 Married) Employer/Employee
All Remaining Wages Employer/Employee
1.45% / 1.45% 2.9% self-employed
1.45% / 1.45% self-employed
Obamacare Tax Hike
1.45% / 1.45% 2.9% self-employed
1.45% / 1.45% self-employed
Medicine Cabinet Tax ($5 bil/Jan 2011): Americans no longer 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)
HSA Withdrawal Tax Hike ($1.4 bil/Jan 2011): Increases 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.
Flexible Spending Account Cap – aka “Special Needs Kids Tax” ($13 bil/
Jan 2013): Imposes cap on FSAs of $2500 (now unlimited). Indexed to
inflation after 2013. 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.
Tax on Medical Device Manufacturers ($20 bil/Jan 2010): Medical device
manufacturers employ 360,000 people in 6000 plants across the country.
This law imposes a new 2.3% excise tax. Exempts items retailing for <
Raise "Haircut" for Medical Itemized Deduction from 7.5% to 10% of AGI
($15.2 bil/Jan 2013): Currently, those facing high medical expenses
are allowed a deduction for medical expenses to the extent that those
expenses exceed 7.5 percent of adjusted gross income (AGI). The new
provision imposes a threshold of 10 percent of AGI. Waived for 65+
taxpayers in 2013-2016 only.
Tax on Indoor Tanning Services ($2.7 billion/July 1, 2010): New 10
percent excise tax on Americans using indoor tanning salons
Elimination of tax deduction for employer-provided retirement Rx drug
coverage in coordination with Medicare Part D ($4.5 bil/Jan 2013)
Blue Cross/Blue Shield Tax Hike ($0.4 bil/Jan 2010): The special tax
deduction in current law for Blue Cross/Blue Shield companies would
only be allowed if 85 percent or more of premium revenues are spent on
Excise Tax on Charitable Hospitals (Min$/immediate): $50,000 per
hospital if they fail to meet new "community health assessment needs,"
"financial assistance," and "billing and collection" rules set by HHS
without public input.
Tax on Innovator Drug Companies ($22.2 bil/Jan 2010): $2.3 billion
annual tax on the industry imposed relative to share of sales made
Tax on Health Insurers ($60.1 bil/Jan 2014): Annual tax on the
industry imposed relative to health insurance premiums collected that
year. Phases in gradually until 2018. Fully-imposed on firms with
$50 million in profits.
$500,000 Annual Executive Compensation Limit for Health Insurance
Executives ($0.6 bil/Jan 2013). Funny that there is no legislation
pending which in any way limits congressional compensation.
Employer Reporting of Insurance on W-2 (Min$/Jan 2011): Preamble to
taxing health benefits on individual tax returns. I am fairly sure
that this will be added to all employees' taxable income. I am simply
not sure exactly when.
Corporate 1099-MISC Information Reporting ($17.1 bil/Jan 2012):
Requires businesses to send 1099-MISC information tax forms to
corporations (currently limited to individuals), a huge compliance
burden, read: more expense, for small employers.
“Black liquor” tax hike (Tax hike of $23.6 billion). This is a tax
increase on a type of bio-fuel.
Codification of the “economic substance doctrine” (Tax hike of $4.5
billion). This provision allows the IRS to disallow completely-legal
tax deductions and other legal tax-minimizing plans just because the
IRS deems that the action lacks “substance” and is merely intended to
reduce taxes owed. This is very likely to cause much distress and
unnecessary fights in tax court. It clearly runs counter to a very
basic tenet: No taxpayer is required to pay more tax than is legally