Backdoor Taxes Loom Large

posted: March 09, 2010

Obama administration seeks one trillion dollar stealth tax

The Obama administration unveiled its 2011 budget last month, revealing that the president plans to trim more than one trillion dollars from the deficit over the next ten years. Unfortunately, those plans are being hatched on the back of middle-class taxpayers who may not know what has hit them until it is too late.

We have done our research and discovered that stealth tax hikes are in the offing with most every American expected to pony up. Big time.

Exploding Budget Deficit

But before we take a look at how you will be impacted, consider this: President Obama is planning to spend an additional $1.7 trillion next year, pushing the deficit up by an additional $2 trillion. That will raise our national debt above $14 trillion (or is it $15 trillion?) making it even more difficult to service our nation’s debt in future years (see U.S. National Debt Clock).

The Obama administration has long promised to raise taxes, but only on the “rich” defined as people who make at least $250,000 per year. That figure was always suspect because if you happen to own a small business and your revenue is in quarter-million dollar territory, you will still get hit even if you pay yourself a much smaller salary.

Tax Rate Hikes

President Obama’s plan won’t be obvious to many Americans because he simply plans to allow a number of tax cuts put in place under the Bush administration to expire. What this means is people in the 35% tax bracket will be taxed at the 39.6% rate; the 33% rate will become 36%; while the 28% rate will rise to 31%.

Even lower income folks will be hit seeing their tax rate increase from 25% to 28%; the 10% tax bracket will be eliminated.

Investors Hit Hard

If you are part of the investing class—and who isn’t, mostly everyone owns shares these days—then you will get hit hard. The capital gains tax is expected to rise from 15% to 20% while the dividend tax will skyrocket from 15% to 39.6%.

The Alternative Minimum Tax (AMT) has been around for four decades now, but it has been a problem for millions of Americans as it wasn’t set up to be indexed to inflation. Under President George W. Bush, a “patch” was put in place to limit its impact, but that patch has already expired. Thus, a number of Americans will soon learn that they may owe more money this year.

The AMT may begin to affect people with incomes as low as the low 30s for single filers (mid-40s for joint filers), but even if the patch was put back in place, millions of middle class taxpayers will still be hit.

Perhaps the most eye-catching of the taxes set to expire are some of the ones that Americans have grown to expect each year including:

• $250 teacher credit for the purchase of school-related supplies.
• Tax on unemployment benefits. In 2009 the first $2400 was exempt.
• The tax deduction for college tuition and expenses, currently at $4000 will disappear.
• Itemizing taxpayers will lose an important option: you will no longer be permitted to deduct sales-tax payments instead of state and local income taxes.
• If you do not itemize your deductions, you will no longer be able to claim the standard deduction of $1000 for property taxes paid.

Reuters Reporting Fiasco

Much of the information included in this article was published by Reuters on Tuesday February 1, who pulled it hours later when Obama’s press secretary, Robert Gibbs, called Reuters and said that the information was a lie.

Reuters removed the article but not before it was disseminated to newspapers and other sources.

Reuters did not give a reason for why the article was removed other than to post the following message in its place: The story Backdoor taxes to hit middle class has been withdrawn. A replacement story will run later in the week. (see Reuters: Backdoor taxes to hit middle class)

Congress will review the budget, make changes, and submit the final bill for the president to sign.  The next fiscal year begins on October 1.