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Tax Hikes: Families at all income levels will be effected if Bush-era cuts not extended

SEPTEMBER 2010

As published in the The Clarion Ledger.

With Bush-era tax cuts set to expire at year's end, John Scott suggests taxpayers keep their accountant's phone number handy.

Scott, a CPA and tax director at Horne LLP in Ridgeland, said families at every income level will see substantial tax hikes in 2011 if Congress does not extend the tax cuts.

"My recommendation is to pay close attention and stay in close contact with your CPA because right now there's no way to know how all this is going to turn out," Scott said.

A typical middle-income family of four with a household income of $69,900 a year would have to pay $2,638 more in taxes in 2011, according to an analysis by the Tax Policy Center.

More affluent families face even bigger tax hikes. A family of four making $500,000 a year would pay $10,800 more in taxes. The same family making $1 million a year would pay $53,200 more in taxes.

Scott said the top two income tax brackets would increase from 33 percent and 35 percent to 36 percent and 39.6 percent, respectively. In addition, the 10 percent tax bracket would be eliminated, leaving the lowest marginal tax bracket at 15 percent.

For the middle class, the maximum amount of income tax credit for each child under the age of 17 would drop from $1,000 to $500, and the "marriage penalty" would return.

Next year also could mark the return of the death tax, which was eliminated this year. Taxpayers might see a 55 percent top tax rate on estates more than $1 million unless Congress acts.

President Barack Obama wants to extend the tax cuts for individuals making less than $200,000 and joint filers making less than $250,000, saying the nation's economy can't afford to spend $700 billion to keep lower tax rates for high earners.

"Albert Einstein once said, 'The hardest thing in the world to understand is the income tax.' In 2010, that quote is making Einstein look like a genius again," Scott said.

Scott said capital gains taxes also could increase from 15 percent to 20 percent in 2011.

"Most of our clients favor the permanent extension of these tax cuts because many of them are successful small to medium-sized businesses who provide most of the job growth for this state and country."

William Shughart, an economics professor at the University of Mississippi, agrees the tax cuts should be extended permanently. He said business investments are particularly sensitive to expectations, and plans are now on hold until the future becomes clearer.

"If tax cuts are extended, I think that will help the economy in not only avoiding tax increases in the next couple of years but also resolving uncertainty about the future," Shughart said.

"One reason businesses are hesitating to hire and consumers are hesitating to spend is the prospect that in a couple of months their tax bills are going to go up," he said.

Like Shughart, Christena Sharrod, a baker and mother of a 3-year-old son, said Congress would prolong economic recovery if the tax cuts are axed. Sharrod admittedly said she has not followed the political back-and-forth in Washington, but she is certain tax hikes would feed economic instability.

"Higher taxes would make it hard for people to budget their expenses and everything else, especially if you have kids," Sharrod said.

Janet Parker, a public relations executive in Jackson, said there is a simple solution to the debate.

"If they want to boost the economy, put more money in people's pockets," she said.

Scott said if Congress does extend the tax cuts, all taxpayers would benefit, especially small business owners.

"A lot of those folks are the ones paying in those top two brackets," Scott said. "The less their taxes are, the more money they have to invest in their business and their people."

Jon Turner, a CPA at BKD LLP in Jackson, said even if tax cuts are extended for those under the $200,000 to $250,000 threshold, they would eventually feel the impact at the checkout counter.

"Those taxpayers will end up paying a 'tax' in the form of higher grocery bills, clothing bills, etc., as small businesses who are indirectly paying higher taxes will raise the prices of their goods," Turner said.

He said many BKD clients are making decisions now to push income into 2010 with the fear taxes will be higher in 2011. Clients are also moving planned 2011 dividend payments into 2010, and considering selling assets with appreciated value this year.

Turner said small businesses could be forced to lay off workers because of higher taxes, and investors will be less inclined to invest in dividend-paying companies as the result of a tax rate increase on qualified dividends.

If the tax cuts expire, qualified dividends will no longer be subject to a maximum rate of 15 percent. Instead, they will be taxed at the same rate as ordinary income, which could be as high as 39.6 percent, Turner said.

Beginning in 2013, the top rate increases to 43.4 percent because of health care reform measures that impose an additional 3.8 percent Medicare tax on investment income for taxpayers with a gross income of more than $200,000, or $250,000 for joint filers.

"A lot of health care reform taxes don't go into effect until 2013, but a lot of provisions under the law are starting to come out," Scott said.