8 Middle-Class Tax Breaks On The Chopping Block

Posted by Wealth Wire – Monday, November 12th, 2012

Politicians have spent years telling you that they will never raise taxes. What they don’t admit is that your taxes can rise anyway, simply by letting current laws expire. And rise they will. Though the “Bush-era” tax cuts were given a two-year extension at the end of 2010, it’s overwhelmingly likely that many of these decade-long tax breaks will expire at the end of the current quarter. That’s the impending “fiscal cliff” the media is buzzing about. Now that the presidential election is over, it’s time to get to work.

That dawning reality has tax advisors scrambling, suggesting key moves now to protect gains from the tax hikes to come.

Let’s take a closer look at eight key tax breaks and assess the likelihood that they will soon evaporate.

Capital Gains

In 1921, the government passed the “Revenue Act,” which provided for a 12.5% tax rate – lower than ordinary income tax rates — for assets held for at least two years. Lawmakers have vacillated ever since, at times pushing the tax rate on investors’ profits up to income tax rates, then pushing them lower. In fact, a key component of tax reform under Ronald Reagan in 1986 pushed the capital gains tax rate from 20% to 28%. Yet when George W. Bush took office, lawmakers pushed through the “Economic Growth and Tax Relief Reconciliation Act of 2001,” which lowered capital gains tax rates to just 15%.

More than a decade later, this investor treat is likely coming to an end. Lawmakers are expected to come up with a new rate — somewhere between the current capital gains rate and the current income tax rates. Estimates of a 20% or 25% tax rate are being discussed, and we’ll get a clearer sense of the actual number as lawmakers revisit the topic. 

Payroll Tax Relief

Every American saw their payroll tax rates fall from 6.2% to 4.2% in 2009 as a way to help out beleaguered consumers. Although both parties stress a continued commitment to middle-class tax relief, an extension of this particular measure actually has little support.

As noted, lawmakers appear set simply to look the other way when the payroll tax cut expires at year end. That will help boost government revenue by an estimated $115 billion every year, though the typical worker will take home roughly $1,000 less in 2012, according to the Tax Policy Center.

Child Tax Credits

Higher payroll taxes are likely to coincide with a reduction in the $1,000-per-child tax credit, perhaps to $500.

For a family with three children, we’re talking about $1,500 in more taxes, which could have a chilling effect on retail spending.

This is a tax that will be deeply felt by middle-income families, as families earning more than $130,000 were ineligible for the taxcredit anyway.

[InvestingAnswers Feature: The 4 Tax Moves You Must Make Before The End Of 2012]

Medicare Surcharge Tax

Even as middle-income taxpayers will feel the pain, higher-income taxpayers won’t be spared.

The 3.8% income tax surcharge, aimed at taxpayers making more than $250,000, was developed to help defray the costs of the Affordable Health Care Act. Now that President Barack Obama has been reelected, it appears that “Obamacare” will be fully implemented and this Medicare tax likely will go into effect.

Earned Income Tax Credit

While the Medicare surcharge would hit high-end taxpayers, a reduction or repeal of this tax break would be felt by low-income taxpayers.

The earned income tax credit (EITC) is highly controversial, with many voters viewing it as an essential form of financial support in a time of deep economic distress, while many others see it as a policy that keeps many Americans from paying income taxes. Many who are eligible for the EITC are among the 47% that Gov. Mitt Romney spoke of in those controversial, secretly recorded comments. Though the EITC is unlikely to be eliminated, it may be subject to a reduction, perhaps back to levels seen before they were hiked in 2009. This would mean the average EITC-eligible family would be in line for roughly $2,000 less in tax credits.

More here: http://www.wealthwire.com/news/finance/4144?r=1

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