The Bush-era tax cuts are scheduled to expire at the end of this year. Unless Congress acts, most taxpayers will see rate and other increases. Here is what taxpayers should expect, unless the election year antics cause an unexpected change.
Higher Tax Rates for All
You might think only individuals in the top two brackets will face higher federal income taxes if the Bush cuts evaporate. Unless Congress takes action and the president (whoever that is) goes along, rates will go up for everyone. Here is what will likely happen:
- 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
- the existing 35% bracket will be replaced by the 39.6% bracket
Higher Capital Gains and Dividend Taxes
Maximum federal rate on long-term capital gains and dividends is 15%. 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) The maximum rate on dividends will skyrocket to 39.6%. People in the lowest two rate brackets of 10% and 15% currently pay 0% on long-term gains and dividends. they 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%, respectively, on dividends.
Harsher Marriage Penalty
The Bush tax cuts included several provisions to ease the so-called marriage penalty, which can cause a married couple to pay more in taxes than when they were single. Right now, the bottom two tax brackets for married joint-filing couples are twice as wide as those for singles. This helps keep the marriage penalty from biting lower- and middle-income couples. the joint-filer tax brackets will contract, causing higher tax bills for many couples Currently, the standard deduction for married joint-filing couples is double the amount for singles. the joint-filer standard deduction will fall back to about 167% of the amount for singles All this means that many lower- and middle-income couples are facing higher tax bills due to a harsher marriage penalty.
Return of Phase-Out Rules for Itemized Deductions and Personal Exemptions
Certain exemption phase-outs will return, and this will most likely require an adjustment to your W-4 form. Use the paycheck calculators at PaycheckCity to help you figure out how many exemptions are best for you and your financial situation.
Some Bush Tax Cuts Are Likely to Be Continued
Some elements of the Bush tax cuts have bipartisan support and will likely be continued beyond this year. Examples include:
- inflation-indexed alternative minimum tax, or AMT
- exemption amounts
- the ability to use nonrefundable personal tax credits to offset your AMT bill
- the deduction for qualified higher-education tuition and fees.
The current versions of the child tax credit, earned-income credit, dependent-care credit and adoption credit also are more likely than not to be continued.