The hurricane season has brought plenty of attention to future weather patterns and strong waves for surfers in North Florida this Summer. However what concerns me more is the recent actions and in-actions by our elected officials in Washington which have the potential to bring waves of tax increases. These waves are powerful and will bring down cash flows of all businesses and individuals in the region while trying to increase government coffers. As always we are here to inform you of the looming dangers and help you prepare for ways to avoid potential disaster.
The first wave of this storm comes in the form of the expiration of the 2001 and 2003 tax relief acts. This wave will bring with it higher personal income tax rates, phase outs of itemized deductions, decreases in personal exemptions, return of the “marriage penalty”, reduction in the child tax credit, reduction in the dependent care credit, losses of deductions for education, higher capital gains taxes, and higher taxes on dividends leaving many Americans with less money and savings.
A deadlocked congress may not be able to pass relief and these tax hikes will go into effect through pure attrition. This week, after Democrats failed to reach a compromise through their own internal process, the debate has been postponed to the lame duck session following the November elections. Many of us expected them to at least push out a bill extending only the middle class tax cuts, but Senator Reid could not get his own 59 senators to agree on that. The prevailing thought is that Washington will come together on a compromise on the tax rates for families who make less than $250,000, but the President’s debt panel has come up with several recommendations that could signal a delay in passing extensions of many of these other provision. The fact that extensions of the child tax credit, marriage penalty relief, and relief from phase outs hasn’t passed in this election year could indicate that they are on the chopping block for everyone.
It has been argued that extending the tax cuts for the top two brackets will cost $700 billion over the next ten years. However, the deficits for 2009 and 2010 have been $1.4 trillion each year. Choosing not to extend tax cuts for the rich will not dent current and projected deficits. Unless you believe that government spending is going to dramatically shrink, it is clear that raising rates just on the top two brackets is not the end of this debate.
Most likely, tax policy for 2011 will be set retroactively in the middle of 2011 and will have a great deal to do with the status of the economy at the time. We will continue to keep you up to date as these changes hit, and in my next blog we will discuss the next wave of tax hikes we are expecting.