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Bush Tax Cuts: Will They Last?

Senate Democrats are about to put forth a tax proposal that would effectively raise taxes for the wealthy, keep middle-class tax rates at their current levels, and reinstate a 45 percent estate tax, says a new Time magazine report. The proposal would extend the George W. Bush-era tax cuts, slated to expire at the end of 2010, but only for people earning less than $200,000. Action on the plan could come as early as next month, with Sen. Harry Reid (D-Nev.) suggesting he'll keep the Senate through the middle of August, the Time report says.

I'm skeptical. There are huge tax issues to be decided, and I don't see Congress really having the stomach to deal with it all on a pre-election fast track. Introducing the proposal and discussing it throughout the fall may give both Democrats and Republicans all they really want of tax policy; mainly, election talking points. The actual passage of big tax changes will probably wait until after the election.

Nonetheless, those tax changes are coming. Many smaller breaks expired at the end of 2009. All of the Bush tax cuts (including rate cuts for income and capital gains) expire at the end of this year. Staggering Federal debts mean it will be hard to avoid raising some taxes, but the weak economy will make it hard to put too much revenue pressure on already strained taxpayers. Here are some issues to consider:

  • It's going to be big and messy, once it gets going. The rules for passing tax measures allow for endless amendments, often called "Christmas tree ornaments" because they can get hung on any tax bill. The prospect that House and Senate leaders will be able to push through any streamlined tax bill is possible, but highly improbable. Republicans won't be able to filibuster, because if no bill passes, the Bush tax cuts expire. They'll need a bill to pass, and they'll need House and Senate leadership to help. Lots of arm twisting will ensue. Messy.
  • Those little breaks could get lost. Items like tax breaks for teachers, above-the-line deductions for property taxes, and the deduction for state sales tax ended on December 31, 2009. The longer it takes them to get renewed, the more likely it is that they will be swept into a more giant, all-inclusive tax package. And that may mean they get swept away altogether.
  • Your taxes will go up. Even without legislation, you've already lost the stimulus credits that were handed out over the last three years. Credits for buying houses and cars are gone, too. If you haven't upped your withholding (or increased your estimated tax payments), you're less likely to get a refund in April, 2011.
  • Taxes on capital gains and dividends are likely to rise. They currently top out at 15 percent; the Obama administration has asked that they go to 20 percent in 2011. That wouldn't be terrible, but if you're still sitting on some nice stock market profits after the summer sell-off, you might want to take them now.
  • Estate tax uncertainty will continue. The longer Congress goes without passing an estate tax, the less likely it is that legislators can do so retroactively. George Steinbrenner's heirs may indeed get a free pass. That means anybody wealthy enough to worry about Federal estate taxes (and it doesn't take that much wealth, roughly $1 million to $3 million for some) needs to have wills that are written with "if/then" language: IF there's an estate tax in effect when I die, THEN distribute my bequests this way, if there isn't, do something different. It's time to call your lawyer, and keep watching that space.
Photo by David Reber's Hammer Photography on Flickr.
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