Taxes Archives - Page 7 of 9

Will The Bush Tax Cuts Be Extended In The Lame Duck Session?

The end of the year is coming quickly, and if you're paying attention to the debate about the Bush tax cuts, you may have noticed that nothing has happened yet. There hasn't been any action on extending the tax cuts for either the higher income earners, or everyone else. If they aren't extended, everyone's taxes will go up.

Currently the Democrats and Republicans are trying to work out some sort of a compromise that would allow the tax cuts to be extended. The Democrats only want to extend them for those making less than $250,000, while the Republicans want them extended for everyone. The Republicans have drawn a line in the sand saying that they won't allow anything except an extension of the cuts for everyone, and have promised to not vote for cloture on anything else in the lame duck session until the tax cut problem has been addressed.

As of yesterday it sounds like most people think that the cuts will be extended for all taxpayers, but possibly not permanently. In other words, they'll have to address the issue in a few years once again. Why are the Democrats willing to cave in on this one? Possibly for concessions on extending unemployment benefits – as those are expiring soon as well for those who have reached the 99 week limit, and the unemployment rates continue to rise – up to 9.8% last month.

Geithner and Lew appear to be stuck in the middle, sources said. A senior Democratic aide said that the White House’s message has been clear: “You can’t leave town without doing something.”

Sources have predicted that the final agreement could include a full extension of the tax cuts for two to three years and an extension of unemployment insurance and a package of other tax extenders. [source]

What do you think will happen? Will they pass an extension before the session ends? Or will there be too little room for compromise?

Good Reading From Around The Blogosphere

Lots of great articles from around the blogosphere this week. Here are a few of my faves.

Hope you have a great weekend!

Flexible Spending Account (FSA) Plan Changes And Limits In 2011 And Beyond

By Mr. Money 7 Comments

A while back I wrote about how our family had signed up for a Flexible Spending Account (FSA) through my workplace because it would allow us to save a decent amount of money on our tax bill by taking money out of my paycheck pre-tax in order to pay for our approved medical expenses.

While the FSA plan isn't necessarily a good idea for everyone because it is a use it or lose it type plan, we knew it was a good decision for us this year because we were anticipating having our first child, along with having other expensive medical procedures.

With the passage of Obama Care this year, we'll be seeing some changes to the FSA next year, and in years to come, that aren't necessarily going to make the accounts more attractive. In fact many are starting to say we should start calling them “In-flexible Spending Accounts”. They'll be limiting what types of things you can use the FSA to pay for, as well as how much you can contribute to the account.

Why the changes? In my opinion it's because they need more tax money to help pay for the Health Care Bill.

Flexible Spending Account Changes In 2011

There main changes to FSA accounts in 2011 is in how the accounts can be used. In the past you could use the flexible spending account for any variety of over the counter (OTC) medications, including things like allergy medicine, cough syrup and band-aids.

Starting on January 1, 2011, flexible spending account participants will need a doctor’s prescription in order to use their FSA to pay for over-the-counter medications, ones that in the past have been OK to purchase with FSA funds without a prescription.

While this change may not seem like it's doing much because you can still purchase a lot of the same things, the effect it will have will be to effectively cut out a ton of the over the counter medication purchases because people don't want to go to the doctor to get a prescription for cough syrup. In fact, the Joint Committee on Taxation estimates that tightening up the tax break on over-the-counter purchases will generate an estimated $5 billion in federal revenues through 2019.

Flexible Spending Account Changes In 2013

The other big change that will be happening for FSA accounts is that the government will be capping the amount that you can put into your account. Most plans currently will cap contribution amounts to flexible spending plans at $5000. Beginning on January 1, 2013, contributions to FSAs will be capped at $2,500 per year.

By capping the amount to $2,500 the government hopes to collect quite a bit of extra tax revenue because not as much money can be used pre-tax to pay for medical expenses. The Joint Committee on Taxation estimate this change will allow the government to raise about $14 billion between now and 2019.

What The Change Means For The Average Family

For most employees, capping the funding limit at $2,500 won’t have a huge impact. According to Hewitt Associates, the average amount contributed to employee sponsored FSAs in 2009 was only $1,535, well below the $2,500 new limit.

The problem is the people that it does hurt are those who have severe health issues or large medical bills, are the ones that could use the tax break the most.

Tax Impact Of The New Rules: For a family who contributed $5000 to an FSA last year and are in the 28% tax bracket, the health care costs and taxes would increase $891 a year due to these changes. Figure out your own impact using the calculator found at savemyflexplan.org

Some Legislators Trying To Repeal The New FSA Rules

A bunch of legislators have recognized that the changes to the FSA rules may be harmful to a lot of people, and are aiming to have them repealed. Legislation introduced by Senator Kay Hutchinson and Representative Erik Paulsen (S. 3673 and H.R. 5126) would repeal the planned $2,500 contribution cap and requirement for patients to secure a doctor’s prescription in order to have OTC medications covered with an FSA. If you're in favor of having the changes repealed, you're advised to send letters to your congressional delegation. Check out this site for details.

What do you think about the changes to the Flexible Spending Account plans? Do you think they are necessary to fund health care initiatives, or do you think they should be repealed? Do you use a FSA currently? How much would you stand to lose due to these changes?

President Obama Agrees To Extend Bush Tax Cuts For Everyone… For Now

By Mr. Money 4 Comments

I‘ve been writing about the Bush tax cuts on this site for quite a while, talking about whether or not they'll be renewed. We also looked at whether they'll be renewed for all taxpayers, or if they'll be allowed to expire for higher income individuals.

Earlier this year it looked like they would be renewed, but only for some. Obama talked about how he would like to renew the tax cuts for middle class and lower income groups, but how he wanted them to expire for those making more than $250,000. At the time, they may have been able to do just that since the democrats ran both the House and the Senate.

Since then no action has been taken on the tax cuts, and if something isn't done soon in the lame duck session of congress, the tax cuts will expire altogether for everyone.

Last night, however, Obama's senior White House adviser David Axelrod said that the President would be willing to consider an extension of the tax cuts for everyone.

Bush Tax Cuts To Be Extended For All?

So what brought about Obama's change of heart, and why is he willing to consider extending the tax cuts for high income individuals as well? It may have had something to do with a recent election where the Democrats lost their majority in the house, and saw their lead in the Senate diminish.

In an interview with the Huffington Post on Wednesday, White House Senior Adviser David Axelrod seemed to open the door to the extension of the cuts for American households making more than $250,000 a year, citing the political reality that has resulted from the loss of Democratic seats in Congress in last week's midterm elections.

Extending tax cuts for the top income bracket had previously been a red line the administration refused to cross. “We have to deal with the world as we find it,” Axelrod said in the interview. “The world of what it takes to get this done.

“There are concerns,” he said about Congress continuing to kick the issue down the road by passing temporary extensions for wealthy Americans each time the issue emerges. “But I don't want to trade away security for the middle class in order to make that point.”

So it sounds like Obama, realizing that the makeup of Congress has changed making it tougher to get through his legislative priorities, is now willing to do some things he may not have wanted to. If he wants the tax cuts extended for the poor and middle class as he promised, he'll have to make a concession on extending them, at least temporarily, for high income earners as well.

Republicans are obviously happy about this as they have pushed extending the tax cuts for all for some time. On the other hand, the Republicans would like to make the cuts more permanent as well.

A spokesman for likely House Speaker John Boehner praised Axelrod's position in a statement:

“Republicans made a pledge to America to permanently stop all of the tax hikes scheduled for January 1st. We're glad to see that the President's most trusted advisor now agrees with this course of action, and hope he and the President will show leadership by convincing Speaker Pelosi to stop these tax hikes permanently in the upcoming lame duck session,” said spokesman Michael Steel.

Will The Bush Tax Cuts Be Extended?

So now we have Obama saying that he will approve extending the cuts for everyone – even if only temporarily for some of them. But the question remains, will the leaders in his party agree to this as well? Some have already come out saying that they aren't in favor of this, and don't want to extend them for the wealthy (as they define wealth).

So what do you think? Will the bush tax cuts be extended in the lame duck session? Will it be done permanently, or on a temporary basis only? What do you think they should do? Tell us your thoughts in the comments.

UPDATE: The day after I wrote this President Obama backtracked on this a bit saying that he may not want to extend them for high income individuals. So we're back where we started. We'll see what happens!

$1500 Energy Tax Credit For Energy Efficient Home Improvements Runs Out Soon

By Mr. Money 6 Comments

As the end of the year approaches, a lot of people are scrambling to try and schedule work on their homes that they had been putting off. The reason? Most of the tax credits for energy efficient home improvements that were passed a while back will be expiring at the end of the year on December 31st, 2010.

Details Of The $1500 Energy Efficiency Tax Credit

So here are the basic details of the credit.

Tax Credit: 30% of cost of the home improvement, up to $1,500
Expires: December 31, 2010
Limitations: Must be on an existing home & your principal residence. New construction and rental homes don’t qualify for the credit.

So what that means is that for a qualified home improvement, you would get a tax credit of 30% of the covered cost up to a $1500 total credit. For instance, if you pay $3000 for a gas furnac (excluding installation costs), your credit would be $900.

How To Claim Your Tax Credit

In order to get your tax credit, it would need to be claimed on your 2010 taxes.

For products “placed in service” in 2010, you would take the tax credit on your 2010 income taxes.

Your home improvement should have been placed in service in 2010 if you plan to claim the tax credit for the 2010 tax year.

What Energy Efficient Products Are Eligible?

The tax credit for energy efficient home improvements will apply to a variety of energy star rated products, although not all.

If you purchase an energy-efficient product or renewable energy system for your home, you may be eligible for a federal tax credit. …

Please note, not all ENERGY STAR qualified products qualify for a tax credit. ENERGY STAR distinguishes energy efficient products which, although they may cost more to purchase than standard models, will pay you back in lower energy bills within a reasonable amount of time, without a tax credit

Among the most common products to be eligible:

Biomass Stoves.
Energy efficient doors and windows. Installation costs are not eligible for the credit. Other restrictions apply.
Water Heaters. Credit includes installation costs; some restrictions for energy efficiency apply.
Insulation, whether spray foam, fiberglass, or blow-in cellulose, they’re all covered so long as they meet IECC requirements. Installation cost is NOT covered.
HVAC components, including advanced air handlers, air force heat pumps, central A/C units, boilers, propane, and gas furnaces. Tax credits include installation costs.
Metal and asphalt roofs. Credit doesn’t include installation costs.

For more details on what products are eligible, FAQs and more, check out the government site here: Federal Tax Credits for Consumer Energy Efficiency

2011 Federal Income Tax Brackets: Official IRS Marginal Tax Rates

By Mr. Money 2 Comments

The 2011 tax year is one that has as lot of things yet to be determined. Where the tax rates will fall is anybody's guess – even if we can make a pretty good guess.

UPDATE: After the Bush era tax rates were extended in December 2010, the 2011 tax rate tables were released. You can view them at the bottom of the page

There are a couple of things that could help to determine where the tax brackets fall. What happens in these situations will determine where they end up.

The Bush tax cuts expiring. The Bush tax cuts will expire at the end of the year if they aren't renewed by Congress. If they do, everyone's rates will go up.
Obama administration wants to renew tax cuts for lower brackets: If Obama gets his way, the tax cuts will expire for high income earners as was proposed in the 2010 budget. Whether the Republicans will go along with an extension only for some brackets remains to be seen!

Quite a few groups have put out what they believe the tax rates will look like in 2011. Here is one put out by the Tax Policy Center that looks pretty close to what most of them have.

2011 Tax Brackets ( If Tax Cuts Are Renewed For Some - Obama's Plan)	Single	Married Filing Jointly
10% Bracket	$0 - $8,425	$0 - $16,850
15% Bracket	$8,426 - $34,200	$16,851 - $68,400
25% Bracket	$34,201 - $82,850	$68,401 - $138,050
28% Bracket	$82,851 - $192,000	$138,051 - $232,950
36% Bracket	$192,001 - $375,700	$232,951 - $375,700
39.6% Bracket	$375,700+	$375,700+

Of course, if they aren't able to get anything done, the tax rates will go up for everyone. Then the rates will look like this:

2011 Tax Brackets (If Bush Tax Cuts Expire)	Single	Married Filing Jointly
15% Bracket	$0 - $8,500	$0 - $17,000
15% Bracket	$8,500 - $34,550	$17,000 - $57,700
28% Bracket	$34,550- $83,700	$57,700 - $139,500
31% Bracket	$83,700 - $174,650	$139,500 - $212,600
36% Bracket	$174,650 - $379,650	$212,600 - $379,650
39.6% Bracket	$379,650+	$379,650+

So you can compare, here are the 2010 tax brackets:

2010 Tax Brackets	Single	Married Filing Jointly
10% Bracket	$0 – $8,375	$0 – $16,750
15% Bracket	$8,375 – $34,000	$16,750 – $68,000
25% Bracket	$34,000 – $82,400	$68,000 – $137,300
28% Bracket	$82,400 – $171,850	$137,300 – $209,250
33% Bracket	$171,850 – $373,650	$209,250 – $373,650
35% Bracket	$373,650+	$373,650+

So based on the assumption that most are making that the tax cuts will be extended for some, but not for those making over $250,000, the tax rates for next year should look like the first table above. That would mean the following changes to the tax rates for 2011.

39.6 percent tax rate reinstated for 2011
The 33 percent tax rate would increase to 36 percent and the thresholds for that tax bracket would also change for 2011.

UPDATE: After the Bush era tax rates were extended this month, the 2011 tax rate tables were released. Since the tax cuts were extended for everyone, the tax rates will remain essentially unchanged except for some change in the ranges due to inflation.

2011 Tax Brackets	Single	Married Filing Jointly
10% Bracket	$0 – $8,500	$0 – $17,000
15% Bracket	$8,500 – $34,500	$17,000 – $69,000
25% Bracket	$34,500 – $83,600	$69,000 – $139,500
28% Bracket	$83,600 – $174,400	$139,500 – $212,300
33% Bracket	$174,400 – $379,150	$212,300 – $379,150
35% Bracket	$379,150+	$379,150+

Tell us your thoughts on the 2011 tax rates in the comments.

What Happens If The Bush Tax Cuts Expire On January 1st 2011?

By Mr. Money 9 Comments

I‘ve written about the Bush tax cuts several times on this site, mainly wondering if they'll be renewed, and how if they're not renewed the tax rates will go up for everyone who pays taxes (not just the wealthy).

Today I thought I'd take a look at what exactly will happen on January 1st if they're not renewed.

Immediate Impact Of Tax Cuts Expiring

If the Bush tax cuts aren't renewed for everyone, there will be several immediate impacts.

Tax Rates Go Up

the tax rates will go up for everyone who pays taxes. According to CNNMoney.com, you could see less in your paycheck as early as your first paycheck of the year!

If the tax cuts do expire and tax rates go up, you may notice the difference in your wallet as early as January, when your employer starts to withhold more taxes from your paycheck. The Tax Policy Center estimates that a married couple with two kids under 13 and a household income of roughly $75,000 could end up paying about $2,600 more in federal income taxes next year than they would if the tax cuts were extended.

While both parties have stated that they want to renew at least some of the tax cuts, nobody has made it happen yet. The parties disagree as to which of the cuts to extend, and even within the parties themselves there is disagreement.

So what will the tax rates look like under different scenarios – with all of the tax cuts expiring, or with only some expiring? Here are what the marginal tax rates will look like if the Bush tax cuts are allowed to expire either for everyone, or just for some.

If No Tax Cuts Are Renewed
2011 Tax Bracket	Single	Married Filing Jointly
15% Bracket	$0 - $8,500	$0 - $17,000
15% Bracket	$8,500 - $34,550	$17,000 - $57,700
28% Bracket	$34,550- $83,700	$57,700 - $139,500
31% Bracket	$83,700 - $174,650	$139,500 - $212,600
36% Bracket	$174,650 - $379,650	$212,600 - $379,650
39.6% Bracket	$379,650+	$379,650+
If Tax Cuts Are Renewed For Some (Obama's Plan)
2011 Tax Brackets	Single	Married Filing Jointly
10% Bracket	$0 - $8,425	$0 - $16,850
15% Bracket	$8,426 - $34,200	$16,851 - $68,400
25% Bracket	$34,201 - $82,850	$68,401 - $138,050
28% Bracket	$82,851 - $192,000	$138,051 - $232,950
36% Bracket	$192,001 - $375,700	$232,951 - $375,700
39.6% Bracket	$375,700+	$375,700+
Current 2010 Tax Rates
2010 Tax Bracket	Single	Married Filing Jointly
10% Bracket	$0 - $8,375	$0 - $16,750
15% Bracket	$8,375 - $34,000	$16,750 - $68,000
25% Bracket	$34,000 - $82,400	$68,000 - $137,300
28% Bracket	$82,400 - $171,850	$137,300 - $209,250
33% Bracket	$171,850 - $373,650	$209,250 - $373,650
35% Bracket	$373,650+	$373,650+

Child Tax Credit

Another provision of the Bush tax cuts that will expire is that child tax credit. It will drop from $1,000 to $500 per child if it isn't renewed. There will also be tougher eligibility standards in order to claim this credit.

Capital Gains/Qualified Dividends

With the tax cuts expiring, the long term capital gains and qualitified dividend tax rates would increase from a maximum of 15%. Capital gains would then be taxed at a maximum of 20%, and qualified dividends would be taxed at the regular rate of the tax filer, which could be as high as 39.6%.

Marriage Penalty

The provision that gave a married couple filing joint a standard deduction that was twice that of a single person would expire if not renewed.

Return of Phase-Out Rule for Itemized Deductions

The Bush tax cuts put in place a rule that allowed higher income individuals to itemize deductions. If the cuts expire, the phase-out rule could eliminate up to 80% of a higher-income individual's itemized deductions for mortgage interest, state and local taxes, and charitable donations. If you itemize and have adjusted gross income above about $170,000 ($85,000 if you use married filing separate status), this phase-out rule will once again take effect.

Conclusion

In the end, if the tax cuts and side provisions aren't renewed and extended, we'll all be seeing an increase in our taxes next year. If only some of them are renewed, some of us will. Here's to hoping that congress and the administration can put aside their differences and get something done.

What are your thoughts on the Bush tax cuts, and whether they should expire? Would you be willing to pay more if they don't get something done? Do you think they will? Tell us your thoughts in the comments.

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