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Just a week ago, the smart money in financial circles was betting on a year of tax gridlock, punctuated by a bruising battle over the extension of the payroll tax cut.
Then, suddenly, everything turned around. Today Congress quickly passed a bi-partisan deal to extend the payroll tax cut through year-end. The cut will reduce Social Security taxes from 6.2% of income to 4.2% for workers, and put up to $130 billion back into the pockets of lower- and middle-income workers.
The same bill extends unemployment benefits from 59 weeks to anywhere from 89 to 99 weeks and prevents a reimbursement cut for Medicare doctors through the end of the year.
Bigger picture, President Obama has released a new proposed budget which would, among other things, extend the Bush-era tax cuts for all but those in the top two tax brackets. The 33% and 35% marginal rates would go back to their pre-2001 levels of 36% and 39.6%. The budget proposal would also raise the long-term capital gains rate to 20% for single taxpayers with more than $200,000 a year in income, or married taxpayers filing jointly earning $250,000 per year. For these same upper-income taxpayers, the tax rate on qualified dividends would revert to ordinary income rates--up to a maximum of 39.6%. For everyone else, dividends would still be taxed at a 15% or 0% rate, depending on the tax bracket.
The bill would create a permanent solution to the vexing Alternative Minimum Tax, essentially replacing its complex formulae with the so-called Buffett Rule, requiring any household earning more than $1 million a year to pay at least 30% of income in federal taxes.
Also, instead of allowing the current estate, gift and generation-skipping transfer tax rates to expire and default back to a $1 million exemption and 55% tax rate at the end of the year, the budget proposal would take the estate tax system back 2009 rates. That would give each spouse a $3.5 million estate tax and generation-skipping tax exemption, a $1 million gift tax extension for each spouse, and a maximum 45% estate tax rate for amounts above these levels.
In all, the tax proposals are expected to increase government receipts by an estimated $1.5 trillion over the next ten years.
The budget proposal virtually ensures that Congress will take up the extremely messy, highly-partisan issue of taxes during this election year, which may actually be good news for taxpayers. Without Congressional action, estate tax and income tax rates were due to revert back, as of January 1, 2013, to rates not seen in more than a decade.
Stay tuned! |
