Runaway Deficit Leaves Pols With Awful Choices on Taxes

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Uncertainty about Americans' tax future reigns in Washington: Will Bush-era tax cuts be allowed by Congress to expire Jan. 1 or will they be extended? And if extended, how long and for whom? A meeting yesterday between the president and Republican leaders did little to clarify what taxpayers can expect in 2011.

"It's a mess!" says attorney Barbara Weltman. "I've never seen such uncertainty." She's been dispensing tax and business advice for 30 years.

At last count, Congress was entertaining five options: No extension of any tax cuts. Permanent extension of all tax cuts. A two-year extension of all cuts. President Obama's proposal for permanent cuts applying only to the middle class. And a two-year extension only for the middle class.

  • Runaway Deficit Leaves Pols With Poor Choices on Taxes

Correction: Six options, says Ingrid Schroeder, director of the Pew Financial Analysis Initiative—a project aimed at strengthening the U.S. economy: Whereas Obama's proposal defines the middle class as anyone making up to $250,000 a year, a sixth proposal now circulating defines middle class as anybody making up to $1 million.

Among these several scenarios, what's the best and worst outcome a middle class taxpayer can expect?

"The best," says Clint Stretch, managing principal for tax policy at Deloitte Tax LLP in Washington, D.C., "is that between now and Christmas Eve, Congress decides to extend middle class cuts for some period of time—maybe three months, maybe two years."

End to Bush Tax Cuts Looming
End to Bush Tax Cuts Looming

Hardly anyone in Washington, he insists, believes that middle-class tax cuts should not be extended by a few years. One reason: The U.S. is still recovering from the recession. Says Schroeder, "We're in a fragile situation right now. That's why people are considering an extension."

How about the worst outcome? Says Stretch, "The possibility that Congress will do nothing, and that on January 1st tax rates will go back to what they were in the Clinton administration. A married couple with two kids, let's say, making $70,000 a year would see their taxes go up $2,600. That's $50 less in your paycheck every week."

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The increased tax bite on someone single with the same income (but no kids) would be $1,300.

If Congress lets the cuts expire, Weltman says that take-home pay will be lower in 2011 than it was in 2010. She cautions that employees may experience "sticker shock" when they see their first paycheck of the new year.

Among the changes workers can expect if the cuts expire:

-The lowest tax bracket, currently 10 percent, will rise to 15 percent--in effect, a 50 percent increase.

-Reinstatement of the so-called marriage penalty: "Married employees," says Weltman, "will no longer have relief through the 15 percent tax bracket but will pay more than two single individuals with the same income."

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-The child tax credit—currently $1,000 for families with a child under 17—will drop to $500. "A lower credit means a higher income tax on the parent-employee."

-An increase in the supplemental tax rate: Persons receiving bonuses, commissions, or other forms of supplemental pay will see payroll withholding rise from today's 25 percent to 28 percent.

Whether or not Congress extends the tax cuts, Weltman says, other tax changes promise to make 2011 a challenging year. They include:

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