Your Taxes: What’s going on with taxes in Washington?
Tax law is once again making news in Washington. Congress is trying to finalize a few bills before the election season heats up, but what’s at stake and what should you know as a taxpayer? I’ve alluded to a few of these issues in other articles, but let me try and give you an up-to-date summary – even as things change on a daily basis!The biggest news right now is the potential expiration of the Bush tax cuts. In 2001 and 2003, under President George W. Bush, tax brackets were lowered to a range from 10 percent to 35 percent, and capital gains (including sales of stock, land, rental properties, etc.) and dividends were taxed at a maximum of 15 percent. Among many other provisions, the child tax credit was increased to $1,000 per child. These provisions were all set to expire in 2010, and politicians at the time were certain Congress would act during those nine years to find more permanent solutions.We are quickly approaching 2011, and these provisions are still set to expire on December 31, 2010. If this happens, tax brackets will jump back to the Clinton-era tax rates ranging from 15 percent to 39.6 percent, capital gains taxed at 20 percent and higher, and dividends taxed up to 39.6 percent. This means a family with income less than $40,000 may pay about $400 in extra taxes, but someone making $80,000 might pay four times that in additional income taxes. When you consider that the child tax credit will decrease to $500 per child, families could be hit the hardest. Before we all panic, it’s important to remember that tax brackets are quite different from tax rates. Many of us fall in the 25 percent tax bracket, but only pay an effective tax rate of 10-15 percent. And, naturally, no one in Congress is campaigning on a ticket of raising taxes on lower-income working families. There is every expectation Congress will intervene and not allow these rates to revert to the fullest increases possible. However, as I’ve mentioned in the past, we all thought Congress would fix the Alternative Minimum Tax and Estate Tax by now, so without a crystal ball, none of us know for sure. (I published an article about these two changes back in April, and have reposted it at http://www.cpamichele.com if you are interested).Two other issues being debated are the S Corporation requirement to pay payroll taxes on owner’s distributions in addition to their salary, therefore an extra 15.3 percent tax, and the new 1099 law that was passed as part of the health care reform. As it is currently written, beginning in 2012 business owners will have to issue 1099 forms to all vendors they pay more than $600 for goods and services, rather than only unincorporated vendors paid for services. Both of these new laws represent a significant burden to business owners, and there is a good chance new legislation will be passed to get rid of the requirements before they ever take hold. Then again, there is a chance that disagreements in Washington will continue to overshadow any progress made on tax law, so all we can do for now is watch the news, keep our fingers crossed, and vote! Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. http://www.cpamichele.com
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