In the 2010 budget tabled by President Barack Obama on Monday, the White
House wants to let billions of dollars in tax breaks expire by the end of the
year -- effectively a tax hike by stealth.
While the administration is focusing its proposal on eliminating tax breaks
for individuals who earn $250,000 a year or more, middle-class families will
face a slew of these backdoor increases.
The targeted tax provisions were enacted under the Bush administration's
Economic Growth and Tax Relief Reconciliation Act of 2001. Among other things,
the law lowered individual tax rates, slashed taxes on capital gains and
dividends, and steadily scaled back the estate tax to zero in 2010.
If the provisions are allowed to expire on December 31, the top-tier
personal income tax rate will rise to 39.6 percent from 35 percent. But
lower-income families will pay more as well: the 25 percent tax bracket will
revert back to 28 percent; the 28 percent bracket will increase to 31 percent;
and the 33 percent bracket will increase to 36 percent. The special 10 percent
bracket is eliminated.
Investors will pay more on their earnings next year as well, with the tax on
dividends jumping to 39.6 percent from 15 percent and the capital-gains tax
increasing to 20 percent from 15 percent. The estate tax is eliminated this
year, but it will return in 2011 -- though there has been talk about
reinstating the death tax sooner.
Millions of middle-class households already may be facing higher taxes in
2010 because Congress has failed to extend tax breaks that expired on January
1, most notably a "patch" that limited the impact of the alternative
minimum tax. The AMT, initially designed to prevent the very rich from avoiding
income taxes, was never indexed for inflation. Now the tax is affecting
millions of middle-income households, but lawmakers have been reluctant to
repeal it because it has become a key source of revenue.
Without annual legislation to renew the patch this year, the AMT could
affect an estimated 25 million taxpayers with incomes as low as $33,750 (or
$45,000 for joint filers). Even if the patch is extended to last year's levels,
the tax will hit American families that can hardly be considered wealthy -- the
AMT exemption for 2009 was $46,700 for singles and $70,950 for married couples
filing jointly.
Middle-class families also will find fewer tax
breaks available to them in 2010 if other popular tax provisions are allowed to
expire. Among them:
* Taxpayers who itemize will lose the option to deduct state sales-tax
payments instead of state and local income taxes;
* The $250 teacher tax credit for classroom supplies;
* The tax deduction for up to $4,000 of college tuition and expenses;
* Individuals who don't itemize will no longer be able to increase their
standard deduction by up to $1,000 for property taxes paid;
* The first $2,400 of unemployment benefits are taxable, in 2009 that amount
was tax-free.