What Will the End of the Bush Tax Cuts Mean for You?

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imagesThe Bush tax cuts are scheduled to expire at the end of 2012. A lot of you may already be aware of this fact, however, you may not know what it means to you financially. Unless Congress acts there are some serious ramifications to your wallet. Here’s what you can expect.

Hooray! Higher Taxes for Everyone
This will affect tax payers in all brackets. Not just the rich guys in the upper two brackets. Like I said, unless Congress takes some sort of action by January 1, 2013, and the President goes along with it, everybody pays more.

Here’s the skinny:

The existing lowest bracket of 10% will bump up to 15%

The 25% bracket will climb to 28%

The 28% will become the 31%

The 33% bracket will get hiked to 36%

and….wait for it….the 35% bracket will soar to 39.6% OUCH!

Capital Gains and Dividend Taxes Will Go Up
With the Bush Tax cuts, dividend and cap gains taxes max out at 15%, which I feel is reasonable at that level. Starting in 2013, that will increase to 20%. But wait, there’s more. Just when you thought it safe to get income from your investments, the maximum rate for on dividends will an astronomical 39.6%! For investors in the two lowest tax brackets of 10% and 15% they pay an enviable 0% rate on dividends and long-term gains. But that will change next year to 10% on long-term gains, and 15% and 28% on dividends.

Phase-Out Rule Returns for Itemized Deductions
This is one of two that will likely affect more people, especially some with dual incomes. Before the Bush tax cuts were in acted, there was a phase-out rule that could eliminate up to 80% of a higher-income earner’s itemized deductions. Itemized deductions like home mortgage interest, state and local taxes as well as charitable donations. This phase-out comes back in 2013, so there isn’t much time to act prior to the election. So if your adjusted gross income level is above $175,000, get ready to pay a lot more.

Phase-Out Rule Returns for Personal Exemptions
Here’s another rule that could return. This could phase out all those kids you had for tax deductions. In 2012 you received an exemption of $3,800 for each rug rat you have. So here is another big one that could take a huge bite out of your wallet if you are a joint filer with over $265,000 adjusted gross income. It will be $175,000 for single parent households, and head of household will be $220,000 threshold. Yikes!

Marriage Penalty Returns
Based on the info I’m about to share with you consider moving that June 2013 wedding to 2012. The Bush tax cuts eased the marriage penalty. The penalty caused a married couple to pay more in taxes than when they were single. The bottom two brackets for married filing jointly currently are twice as wide for singles. In 2013 that standard deduction will fall back to about 167% of the amount for singles. Could this been the cause of so many divorces?

The Bottom Line
Some of the Bush tax cuts have gained support with both parties and will continue. Those tax cuts will be nice to continue to have like child tax credits, earned income tax credit and adoption credit, but they will not impact as severely. As I type this they are actually discussing this very subject on CNBC. Some think that this will leave a 3.5% drag on GDP and effectively putting us back in recession. Unless Congress and the President act quickly, we may be in serious trouble. The bottom line: we will pay significantly more taxes. If you would like to know some techniques to be more tax-efficient, write me at david@lexwealth.com, or call me at (859) 225-2596.