Tax Showdown Set for End of the Year

Tax Showdown Set for End of the Year

At the end of 2012, many tax policies are set to expire. Although many of these tax provisions are commonly referred to as the “Bush tax cuts,” President Obama extended many of these provisions for all income earners for two years in December 20101.

With the expiration of these tax cuts quickly approaching, on July 9, 2012, President Obama called for Congress to extend these tax cuts for another year—but this time with a caveat: letting the tax cuts expire for households with incomes of more than $250,0002. However, since some small businesses file their taxes as individuals, some have raised concerns about this proposal impacting the taxation of small businesses3.

Tax Increase Set Without Congressional Action
In the summary of the tax increases below (as is the current law), President Obama proposes that households making $250,000 or more see these tax cuts expire.

Individual Income Tax Rates
In December 2010, President Obama extended the income tax cuts of 2001 and 2003 through the end of 2012.

Through 2012, the income tax rates are as follows4:

Tax Bracket         Married Filing Jointly         Single

10% Bracket              $0- $17,400                              $0 – $8,700

15% Bracket               $17,400 – $70,700                $8,700 – $35,530

25% Bracket              $70,700 – $142,700              $35,350 – $85,650

28% Bracket              $142,700 – $217,450            $85,650 – $178,650

33% Bracket              $217,450 – $388,350           $178,650 – $388,350

35% Bracket              Over $388,350                         Over $388,350

  • Prior to the 2001 law, the tax rates were as follows (with the actual rate depending on what the taxpayer earns): 15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent.
  • As is stands now, these tax rates will reset to the rates before the 2001 law passed at the start of next year.5

Estate Tax Rate

  • The current rate for the estate tax is 35 percent, with an estate having an exemption of nearly $5 million. (In 2010, the estate tax was repealed—but just for that year.)
  • Without action, the rate of the estate tax is set to skyrocket to 55 percent, with the estate exemption falling to $1 million.6

Dividend and Capital Gain Tax Rates
A dividend is “a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of shareholders7.” In other words, if an individual owns a stock that pays a dividend, they generally receive a portion of a company’s earnings in cash.

  • The current dividend tax rate is 15 percent for most taxpayers.
  • Next year, without action, dividends will be taxed as ordinary income so the rate will skyrocket up to 39.6 percent.8A capital gain is “an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price9.” In other words, if you own stock and sell it at a later date for more than you purchased it for, the difference is a capital gain.
  • The current capital gains tax rate is between 15 percent and 5 percent, with the rate depending on how much income you earn.
  • Next year, without action, the capital gains tax rate will increase to a  rate between 20 percent and 10 percent.10

To view this document as a .pdf, click here.

 

  1. CQ House Action Reports. 111-38. Subscription required. 
  2. Politico. Obama Calls for Middle Class Tax Cut. July 9, 2012. http://www.politico.com/news/stories/0712/78238.html 
  3. Washington Post. Is Obama Aiming to Hike Taxes on ‘Small Businesses?’ April 15, 2011. http://www.washingtonpost.com/blogs/fact-checker/post/is-obama-aiming-to-hike-taxes-on-small- business/2011/04/14/AFqvmPfD_blog.html 
  4. Forbes. 2012 Federal Income Tax Brackets. September 30, 2011. http://www.forbes.com/sites/moneybuilder/2011/09/30/2012- federal-income-tax-brackets-irs-tax-rates/ 
  5. CQ House Action Reports. 111-38. Subscription required 
  6. CQ House Action Reports. 111-38. Subscription required. 
  7. Investopedia. Definition of ‘Dividend.” http://www.investopedia.com/terms/d/dividend.asp#axzz1wYQU2Af3 
  8. CQ House Action Reports. 111-38. Subscription required. 
  9. Investopedia. Definition of Capital Gain. http://www.investopedia.com/terms/c/capitalgain.asp#axzz1wYQU2Af3 
  10. CQ House Action Reports. 111-38. Subscription required. 

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