Democrats' Ticking Tax Bomb, Part I

Overview: Americans to Pay Higher Taxes Starting January 1, 2011

Get ready to pay higher taxes in 2011 thanks to Democrats in Washington. Starting January 1, 2011 – less than six months from now – an unprecedented, $3.8 trillion tax increase is scheduled to kick in, affecting every American who pays income taxes. This Democrat tax hike will force hard-working Americans to pay over $200 billion in higher taxes next year alone.

What are some of these tax increases? They include:

Higher Income Tax Rates on ALL Americans Who Pay Income Taxes
Individuals and Small Businesses* with Taxable Income in the Following Ranges…	… Pay This Statutory Rate on that Range of Income in 2010…	…But will Pay This Statutory Rate on that Range of Income in 2011
Up to $8,375 for single filers and Up to $16,750 for married couples	10%	15%
Between $8,375 and $34,000 for single filers and Between $16,750 and $68,000** for married couples	15%	15%
Between $34,000 and $82,400 for single filers and Between $68,000** and $137,300 for married couples	25%	28%
Between $82,400 and $171,850 for single filers and Between $137,300 and $209,250 for married couples	28%	31%
Between $171,850 and $373,650 for single filers and Between $209,250 and $373,650 for married couples	33%	36%
Over $373,650 for both single filers and married couples	35%	39.6%***

Dollar amounts listed in the table above will be indexed for inflation in 2011.  Amounts listed for married couples are for married couples filing joint returns.
*According to the Joint Committee on Taxation (JCT), 94% of all U.S. businesses in 2007 were S corporations, partnerships, or sole proprietorships – “pass-through” business types commonly used by small businesses – that file their taxes on their owners’ individual Form 1040s and pay taxes at the individual tax rates.
** Because of one of the marriage penalties that will be reinstated (see below), this $68,000 amount will drop to $58,200 in 2011, meaning that a married couple with as little as $58,200 in taxable income will be subject to the higher 28% rate on their next dollar earned, rather than the 15% rate.
*** Because of the reinstatement of additional, hidden tax rates (see below), while the top statutory rate will be 39.6% in 2011, the top effective rate will actually be 41.6%.

Higher Taxes if You Are Married
For Married Couples Filing Jointly, the Marriage Penalty Is Reinstated With Respect To...	2010	2011
The Standard Deduction	Singles: $5,700 Married:  $11,400 No marriage penalty because the standard deduction for married couples is twice the standard deduction for singles	Singles: $5,800 Married: $9,750 Marriage penalty is reinstated because the standard deduction for married couples is $1,850 less than twice the standard deduction for singles
The last dollar of income taxed at the 15% rate (instead of at 25% in 2010 or at 28% in 2011, the next highest tax rate in effect)	Singles: $34,000 Married:  $68,000 No marriage penalty because the last dollar of income taxed at 15% (instead of at 25%, the next highest rate) for married couples is twice the corresponding amount for singles	Singles: $34,850 Married: $58,200 Marriage penalty is reinstated because the last dollar of income taxed at 15% (instead of at 28%, the next highest rate) for married couples is $11,500 less than twice the corresponding amount for singles

Dollar amounts listed in the table above for 2011 are JCT estimates reflecting expected inflation adjustments.

Higher Taxes if You Are A Parent
Pro-family Tax Benefit	2010	2011
Child Tax Credit	$1,000 per child	$500 per child

 

Higher Taxes on Investments that Grow the Economy and Create Good Jobs
Investment Incentive	2010	2011
Top rate on long-term capital gains	15%	20%*
Top rate on qualified dividends	15%	39.6%*

* Because of the reinstatement of additional, hidden tax rates (see below), while the top statutory capital gains rate will be 20% in 2011, the top effective rate will actually be 22%.  For dividends, while the top statutory rate will be 39.6% in 2011, the top effective rate will actually be 41.6%. 

Note that, under the Democrats’ new health law, beginning in 2013, investment income will be subject to an additional 3.8% surtax for single taxpayers earning more than $200,000 and married couples earning more than $250,000.  This will bring the top statutory rate on capital gains to 23.8% and the top statutory rate on dividends to 43.4% in 2013.  Because of the additional, hidden tax rate increases described below, however, the top effective rate on capital gains will be 25.8% in 2013, and the top effective rate on dividends will be 45.4%.

Higher Taxes through Additional, Hidden Tax Rate Increases
Hidden Tax Rate Increase Reinstated	Individuals and Small Businesses* with Adjusted Gross Income…	… Pay this additional, hidden tax rate increase in 2010…	… But pay this additional, hidden tax rate increase in 2011
Personal exemption phase-out (PEP)	Above $171,000 for single filers and Above $256,700 for married couples filing jointly	None	Approximately 0.8%
Pease limitation on itemized deductions (such as mortgage interest, charitable contributions, and state and local taxes)	Above $171,000 for both single filers and married couples filing jointly	None	Approximately 1.2%
Top effective marginal tax rate on income (including dividend income) in 2011, including reinstatement of these hidden tax rate increases:     39.6% (top statutory rate)       0.8% (PEP) +    1.2% (Pease limitation)     41.6%

*According to the Joint Committee on Taxation (JCT), 94% of all U.S. businesses in 2007 were S corporations, partnerships, or sole proprietorships – “pass-through” business types commonly used by small businesses – that file their taxes on their owners’ individual Form 1040s and pay taxes at the individual tax rates.

Dollar amounts listed in the table above are JCT estimates for 2011 reflecting expected inflation adjustments.

Note that, under the Democrats’ new health law, beginning in 2013, dividend income will be subject to an additional 3.8% surtax for single taxpayers earning more than $200,000 and married couples earning more than $250,000.  Factoring in the additional, hidden tax rate increase described in this table, the top effective rate on dividends will be 45.4% in 2013.

Resurrection of the Death Tax
Estate Tax Provision	2010	2011
Exemption amount	N/A – Death Tax repealed	$1 million
Top rate	N/A – Death Tax repealed	55%

For examples of how these looming tax hikes will affect typical American taxpayers, stay tuned for Part II of this series, coming soon.