Plan Now For Tax Increases

by | Sep 27, 2010 | Cash Flow, In The News, Tax Planning, Weekly Column | 2 comments

A brief AP story on an inside page of our local paper recently caught my eye. The headline was “Expiring tax cuts will hit all taxpayers.”

One of the topics in the news this year has been whether Congress will take action to continue the Bush tax cuts from 2001 or allow them to expire on schedule at the end of this year. These are commonly described as “the Bush tax cuts for the rich.”

The AP story pointed out the lesser-known aspect of the 2001 tax change—the impact it had on middle-class taxpayers. It said that if Congress doesn’t act soon, on January 1, 2011, a family of four with an annual household income of $50,000 will see its federal tax bill increase by $2,900, almost 6%. If that same family made $100,000 a year, its taxes would rise by $4,500, or 4.5%. A family of four making $500,000 a year would pay $10,800 more, about 2%. Families earning over $1 million a year will see their taxes increase by 5.3%, almost as much as those earning $50,000.

At first blush it would be easy to conclude this isn’t fair. The percentage increase in new taxes will be three times as much for someone earning $50,000 a year as it will for someone earning $500,000 a year. Is this one more example of “favoring the rich”?

While it is true middle class taxpayers will be hit harder than upper income tax payers, that is just part of the story. Earlier news stories about the tax cuts have not emphasized this not-so-obvious fact: the 2011 increases were equivalent tax cuts first. In 2001, the family earning $50,000 a year got a tax cut three times greater than the family earning $500,000.

That fact is not something we’ve heard about during the past few years. Instead, we’ve heard over and over from many politicians that the Bush tax cuts of 2001 and 2003 favored the rich and were the very economic blunder that “got us into this mess.”

The AP finds the Bush tax cuts favored low and middle income workers far more than upper income families. Even more, those upper income families are paying a far greater percentage of their income in taxes than the middle class. The family earning $500,000 is in the 35% tax bracket while the family with the $50,000 income is in the 15% bracket. This reality flies in the face of the public perception, fostered by many politicians, that the rich aren’t paying their “fair share.”

The moral of the story is, whether you are a liberal, a moderate, or a conservative, there is a high probability your taxes will be going up. Here are some ways to prepare now for the increases:
• Don’t wait to see what Congress might or might not do, but assume the tax cuts will expire.
• Do your own “tax audit” now to estimate what your tax obligation will be for 2011.
• Trim spending.
• Increase your withholding or estimated tax payments.
• Make sure you’re taking advantage of all deductions and tax credits that apply to you.

You don’t want April 15, 2012, to bring you the unpleasant surprise of learning you need to write a huge check and will have to wipe out your emergency fund or even get a loan to pay your taxes. Plan now for tax increases next year. If the cuts should be extended, you’ll have added to your savings. If they aren’t, you’ll be prepared. Either way, you’ll be doing what you can to take care of your own financial health.

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