It's the Great Tax Punt, Charlie Brown

There's been a lot of buzz recently about taxes, and with good reason. With the Bush tax cuts about to expire, congress faces the difficult task of deciding for whom the tax cuts should be renewed. I am more than willing to admit that it's an incredibly difficult question to answer, but I am also disappointed that the government did what it almost always does (republican or democrat) and avoided the tough questions until after mid-term elections. Why does it matter when tax laws are decided if it doesn't impact taxes until 2011? Because it makes it almost impossible for people to plan financially, and much more likely that economic growth will remain sluggish until legislation is decided.

Americans (especially those owning small businesses) as well as corporations are in this weird no-man's-land... unable to plan spending/growth until they know what tax rates will be. My father-in-law owns his own business, and has had to lay off several people recently due to the threat of rising tax/health care costs. If tax legislation was finalized, he would at least have a better sense of his future expenses and could move forward with less fear of the unknown.

At this point I think many people tune out of the tax debate, thinking "I don't make more than $200,000 a year, or own a business so who cares?". Yes, you are under the current definition of "rich" by Obama (though the issues with defining "rich" may earn its own post). But your income is still going to be impacted, particularly through capital gains/dividend tax and through AMT.

Dividend taxes could range from 15% to 40% depending on what plan congress adopts. That makes a huge difference, even to a 'small time' investor like me. Because ANY stock you hold, no matter how much annual income you make, will be taxed for how much it's value goes up over time (capital gains) and what dividends it pays out (qualified dividend income). Thus, cap gains/dividend tax rates impact anyone with savings in stocks/mutual funds.

The AMT (Alternative Minimum Tax) is also posed to strike those decidedly not "rich." AMT was created in the 1970s to ensure that the uber-wealthy paid tax and weren't hiding under a barrage of tax shelters/deductions. AMT essentially forbids you from taking most deductions on your tax return (so no mortgage tax deductions, personal deductions, kid deductions, reduced values of charitable deductions*). Props to the lawmakers - in my opinion, this actually made sense at the time. However, the problem is that AMT wasn't indexed to inflation. So making $30K/year in 1970 made you rich (average income was ~$7,600), but today $30K/year is not-so-rich. Congress periodically "patches" the AMT to raise the exemption level, but if they don't act soon for 2011, the individual exemption for AMT will bounce back down to $33,750 for single tax payers and $45,000 for married filing jointly, raising taxes for an estimated 50+ million people. Eeek.

The graph on left from The Tax Foundation shows how different the AMT effect could be based upon what plan congress adopts. To check out how the different plans could affect your personal taxes, check out the tax scenario calculator.

So congress: please, put in the quarterback and make a play! I know it's tough, and taxes are never popular (I'm a CPA and I still hate taxes), but it's YOUR JOB to DECIDE SOMETHING. At least then we'll have a sense of what's coming... and know if the light ahead is the light at the end of the tunnel, or the light of an oncoming train.


*Props to my mom for correcting a fact: initial posting said charitable deductions weren't allowed under AMT. As my mom points out, they are allowed... but they're a bit less valuable due to differing tax rates used by AMT vs regular tax returns.