Despite promises made by the current administration to the contrary, everyone should be getting ready to pay more in taxes. Whether you are a young couple just starting out or someone in the twilight years of retirement, paying more in taxes may be just around the corner. In fact, it has already started.
To prepare for higher taxes, everyone should look to see how they can create excess monthly cash flow. If this is possible, as the higher or new taxes become a reality the excess cash will be available to meet this higher burden. The easiest way to accomplish this, is to reduce the number of outstanding debts. When this is done, a minimum payment is also eliminated thus creating excess cash.
As to the change in taxes, it is happening on numerous fronts. In some cases, the tax rates are not being changed, but access is being reduced or restricted. The result is the same, the taxpayer is paying higher taxes, although those in Congress may say they did not raise taxes. Here are some of the changes we are likely to see sooner rather than later.
Those employees which participate in their employer’s flexible spending accounts (FSA), have already seen one change. Earlier this year the rules were changed where over-the-counter medicines could no longer be purchased using FSA accounts. Money spent from an FSA account is before income and social security taxes. To purchase $10 of qualified merchandise only requires $10.00 of a paycheck if the funds are from the FSA, but requires $13.45 of the paycheck if taxable dollars are used. Clearly, an increase in taxes regardless of the level of income.
The maximum contribution limit for flexible spending accounts also appears to be heading for a haircut. While $5,000 is the current limit, it appears this may be reduced to $2,500 for 2011. This will result in higher taxes for those employees who in the past contributed more than the new limit. Employers will also be impacted since the contribution limit is being reduced. For every $1,000 that can no longer be deposited into the FSA due to the change in limits, the employer will be paying $76.50 in additional payroll taxes.
As most everyone knows, there is no estate taxes imposed for those passing away in 2010. But without action by Congress, the estate taxes will be restored starting 2011. And without appropriate estate planning documents in place, everyone whose net worth is above $1 million may incur at the time of their death tax rates approaching 50 percent on the estate’s value above the million dollar limit! This could impact many land owners who have modest incomes, but own property worth $1 million or more.
There are other tax reductions which are set to expire at the end of this year. Without Congressional action, the capital gains rate will return to 20 percent and corporate dividends may be taxed at ordinary income tax rates again rather than capital gains rates. This may impact tax filers of all income levels unless Congress takes steps to ease the burden on low and modest income citizens.
Due to the duration of the recession and continued high unemployment, all businesses large and small have been impose higher unemployment taxes. And some states like Tennessee, also increased the amount of wages subject to the unemployment tax.
For the higher income earners, those earning more than $200,000 be prepared to pay 0.9 percent higher payroll taxes and have a 3.8 percent levy on investment and gain income. The top income tax rates will once again approach 40 percent. For tax filers in the two highest brackets, the amount of their schedule A deductions and personal exemptions will once again be limited or phased out due to their income levels. While the alternative minimum tax (AMT) is being addressed, this tax may still impact many new tax payers for 2010 and beyond. Some of these changes are scheduled to take place after 2011.
There are estimates the additional tax revenues could reach $300 billion or higher over the next ten years. While changes may be made before the next tax returns are due, it is clear the size of our government has increased significantly and as such, so has its appetite. The question becomes who will be paying the bill, and how large will it grow?
For assistance with insurance, estate planning, and investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.