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Prepare for the coming increase in taxes

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July 29, 2010 – Comments (9) | RELATED TICKERS: TA , X , ES.DL

I've read a few articles on the coming tax hike storm that will hit the middle class like a ton of bricks but as usual US News and World report hits the nail on the head.  I've warned for a couple years now that the mortgage interest tax deduction was going away and should not be relied upon as part of ones decision to buy a home. I was often dismissed with hems and haws and "thats not going to happen".  All of the articles I've read this year confirm that prediction. So those of you who were depending on that schedule A for tax planning, I suggest you find another schedule. Schedule C maybe?

http://finance.yahoo.com/news/When-the-Tax-Hikes-Are-usnews-2864423913.html?x=0

Either way, here are some excerpts.

When the Tax Hikes Are Coming

If you love class warfare, your moment has arrived. The next several weeks, leading up to the November elections, are sure to be filled with resounding political invective over who should pay for Washington's profligate spending over the last decade. Democrats will argue that the rich and near-rich should pony up, since they have the most money to start with. Republicans will point to the needy, arguing that they've been getting too much aid for too long. Tea Partiers will struggle to decide whose benefits should be cut in order to achieve the smaller government they envision. All around, livelihoods will be threatened. Instead of the "silly season," the midterm elections will feel like the angry season.

It's the job of Obama and his fellow politicians to make sure that doesn't happen, and they're thinking about getting around to it some day, maybe. Most economists feel the solution is a combination of tax increases and spending cuts, [My comment: No COMMON SENSE says to cut spending and raise taxes, most "economists" say to spend more] since doing one or the other alone would be too draconian to disguise with the usual opposite-speak out of Washington. The first real opportunity to do something arises this fall, since income taxes for most Americans will automatically go up unless Congress and Obama extend some of the Bush tax cuts. Here's what's likely to happen:

Wealthy taxpayers are going to pay more. Obama wants to raise the top two income brackets from the Bush-era levels, which means the top rate will rise from 35 to 39.6 percent and the rate in the next bracket will rise from 33 to 36 percent. That effectively means that taxes will rise for individuals with income over $200,000 and couples earning over $250,000 (after accounting for deductions). There will also be new limits (same as the old ones, before the Bush cuts were enacted) on the total amount of allowable deductions, which will bump a few additional people into these higher brackets. To enact these "tax hikes" on the wealthy, Congress doesn't need to do anything--it will happen automatically at the end of 2010, once the Bush tax cuts are over.

The middle class will get a temporary pass, but it will only defer the inevitable pain. Obama has pledged no new taxes on the middle class, and no matter how implausible that is, it's hard to see him breaking that promise in his first term. Besides, raising the income tax rates on the majority of taxpayers would be risky in a lousy economy, so the odds are high that Congress will extend the Bush tax cuts for those who fall below the $200,000/$250,000 thresholds. The Senate, which moves slower than the House, may not get to that before the November elections, so the action may come in the lame-duck session that follows, leading to plenty of high-volume gamesmanship right up until the elections. But not much will change for the majority of taxpayersPossibilities include not just higher tax rates on those who already pay, but a host of scaled-back deductions--including the mortgage-interest deduction for home purchases--and a new value-added tax that could raise the cost of most goods and services. Exemptions for lower-income workers could be narrowed as well, so more people pay taxes. The tumult will be fascinating, since voters are likely to revolt no matter how bankrupt American becomes or what is fiscally prudent. But for now, politicians are looking the other way.

[My comment: And this is just at the FEDERAL level.  But states and municipalities are hurting as well so I would expect tax increase and spending cuts across all governemnt jurisdictions]

 

9 Comments – Post Your Own

#1) On July 29, 2010 at 11:27 AM, Deepfryer (27.62) wrote:

The article says, "Possibilities include..."

That sounds like speculation to me. Relax.

My prediction is that we will see some very large cuts in defense spending (a move I support 100%). But I see no reason to believe that Obama will raise taxes on the middle class.

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#2) On July 29, 2010 at 11:35 AM, outoffocus (22.91) wrote:

If Bush's tax cuts are allowed to expire this year, the middle class will be affected indirectly because more taxpayers will be subject to the AMT which will effectively negates the mortgage interest tax deduction. One way or the other taxes are going up.

If you want to relax thats fine and thats your perogative.  My target audience are people who have or plan to use the mortgage interest tax deduction in order to determine their affordability for a house which I believe is a foolish decision. The deduction should simply be an added benefit of home ownership rather than the determining factor.

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#3) On July 29, 2010 at 11:59 AM, binve (< 20) wrote:

Hey outoffocus

>>I've warned for a couple years now that the mortgage interest tax deduction was going away and should not be relied upon as part of ones decision to buy a home. I was often dismissed with hems and haws and "thats not going to happen".  All of the articles I've read this year confirm that prediction. So those of you who were depending on that schedule A for tax planning, I suggest you find another schedule. Schedule C maybe?

Totally agreed. While not a certainty, I agree that this is a very distinct possibility.

>> The deduction should simply be an added benefit of home ownership rather than the determining factor.

Again totally agreed.

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#4) On July 29, 2010 at 12:40 PM, davejh23 (< 20) wrote:

Elimination of the mortgage interest deduction will crush housing.  Many homeowners are barely scraping by, so this is something that some depend on to stay in their homes.  It shouldn't be this way, but it is.  Another negative for housing (I'm assuming this is occurring all around the country): last night, the local news had a story on proposals to increase property tax rates dramatically.  With declining assessed values, rates could increase as much as 50% this year alone.  Homes are still overpriced, and there are many home-owners that stretched themselves based on the maximum payment they could afford.  This is designed to maintain property tax revenues at a certain level.  So, those that have been in their homes for years can get a reduced assessment and their bill should be about the same after the rate increase.  However, for those that bought recently, they could see their mortgage payments, including taxes, increase by a couple hundred dollars each month.

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#5) On July 29, 2010 at 12:59 PM, dsp444 (78.39) wrote:

Didn't mention the child tax credit being reduced from $1000 to $500...pretty much everybody who pays federal income taxes will see a tax increase under Obama (and some people, like me, will start paying taxes - that $4000 in child tax credits put me at zero - that was nice while it lasted)

But the real quesiton is why is in necessary for the tax code to direct personal decision making?  Why do we need the mortgage interest deduction?  Why do we need the child tax credit?  etc.....If these crazy deductions/credits never existed in the first place, would that really be a bad thing (I mean other than for the lobbyists who push this stuff to be accepted)?  Housing prices are inflated because of the bogus tax law.

Bottom line is that income tax law shouldn't have behaviorialist motivations / penalties (assuming of course that income tax should exist in the first place, which isn't a given)

 

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#6) On July 29, 2010 at 1:21 PM, outoffocus (22.91) wrote:

 Didn't mention the child tax credit being reduced from $1000 to $500...pretty much everybody who pays federal income taxes will see a tax increase under Obama (and some people, like me, will start paying taxes - that $4000 in child tax credits put me at zero - that was nice while it lasted

Agreed, the child tax credit reduction is part of a long list of expiring deductions and credits that may hit taxpayers across the board this year.

But the real quesiton is why is in necessary for the tax code to direct personal decision making?  Why do we need the mortgage interest deduction?  Why do we need the child tax credit?  etc.....If these crazy deductions/credits never existed in the first place, would that really be a bad thing (I mean other than for the lobbyists who push this stuff to be accepted)?  Housing prices are inflated because of the bogus tax law.

Bottom line is that income tax law shouldn't have behaviorialist motivations / penalties (assuming of course that income tax should exist in the first place, which isn't a given)

I agree.  As a CPA who prepares taxes, I fully support a simplified tax code that just charges one progressive tax rate. But as long as Congress is full of lawyers that are paid by lobbyists and special interests, we will never have a simplified tax code.

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#7) On July 29, 2010 at 2:28 PM, davejh23 (< 20) wrote:

Do you really believe that Congress will allow all of these tax increases to happen this year?  Not that we aren't already there, but this could plunge the economy into depression.  It's already clear that consumers are cutting back...even those that have steady incomes, etc...  Take away the mortgage interest deduction, the child tax credits, etc..., and most working Americans will see their paychecks reduced.  Most lower/middle-class Americans are already going to see their paychecks reduced as stimulus measures expire.  I believe even a minimal reduction in take home pay will shock many Americans and they will cut back far more...uncertainty causes consumers to freeze...

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#8) On July 29, 2010 at 2:48 PM, outoffocus (22.91) wrote:

davejh23

I think that was the general gist of the article.  Politicians have a dilemma right now,  continue spending and cutting taxes, Americans will be happy but the country goes bankrupt; or raise taxes and cut spending and potentially plunge the country further into a depression. Hence this excerpt from the article:

The middle class will get a temporary pass, but it will only defer the inevitable pain. Obama has pledged no new taxes on the middle class, and no matter how implausible that is, it's hard to see him breaking that promise in his first term. Besides, raising the income tax rates on the majority of taxpayers would be risky in a lousy economy, so the odds are high that Congress will extend the Bush tax cuts for those who fall below the $200,000/$250,000 thresholds. The Senate, which moves slower than the House, may not get to that before the November elections, so the action may come in the lame-duck session that follows, leading to plenty of high-volume gamesmanship right up until the elections.

Simple fact is, sooner or later Congress will have to raise taxes and I dont think the economy will recover enough in time to cushion that day of reckoning.

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#9) On March 28, 2011 at 3:40 PM, ikkyu2 (99.31) wrote:

The deduction should simply be an added benefit of home ownership rather than the determining factor.

How nice that everyone agrees on this.  Perhaps those who do should take a moment to think about what doing away with the deduction would do to home prices.  Of course, prices should also not be a determinant of home ownership - we established that in the last decade!  I suppose nothing should be a determinant of home ownership?  Everyone agree?

People, wake up.  Your country is being taken away from you.

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