When talking about my job / anything that relates to taxes to family and friends, I’m used to the blank stares, glazed-over eyes and the occasional unconvincing “Oh, wow”. But as the up-coming presidential election gets closer and closer, paying attention to what accountants are saying is something all taxpayers should be doing. Why? I’m glad you asked.
Back when George W. Bush was president, tax cuts were passed that favored individual taxpayers (known as the “Bush tax cuts”). These tax cuts were first set to expire at the end of 2010, but because of the state of the economy at the time, legislators were influenced to extend the Bush tax cuts to the end of 2012. During a time when we had a Democratic president but saw heavy Republican victories in the midterm elections, the extension of the Bush tax cuts was seen as a major political compromise.
However, as we are nearing the expiration of the extended Bush tax cuts at the end of 2012, tax analysts do not see a similar compromise this year as a likely scenario. Because of the up-coming election, improved unemployment rates and increasing attention to the climbing national debt figures, it’s unlikely legislators will extend the Bush tax cuts.
Bored yet? If you’re still with me, this is when all of this will hit home: if the Bush tax cuts do not get extended, starting on January 1, 2013, individual income tax rates will return to where they were before the tax cuts. See below for a table summarizing the rate increases:
|Current rates – under the Bush tax cuts||Rates schedule for 2013 – if Bush rates expire|
|10%; 25%; 28%; 33%; 35%||15%; 28%; 31%; 36%; 39.6%|
In addition, we’ll no longer enjoy the lower tax rates on dividends and long-term capital gains. Currently, these are taxed at either 0% or 15% (based on income level). However, if the Bush tax cuts expire, qualified dividends will be taxed at the ordinary income rate (shown above) and long-term capital gains will be taxed at 20%.
So what does all this mean? Well, to some people, it might mean nothing. But to most people, it might mean a lot. If you’re interested in learning more, talk to your tax accountant. In the meantime, to read more about these and the other preferential itemized deductions and tax credits that will expire with the Bush tax cuts, check out these articles by Forbes, CNN Money and The New York Times.