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Fate of Bush Tax Cuts Uncertain As Expiration Approaches

By: Nick Kasprak, William Ahern

In 2001 and 2003, Congress passed, and the President signed into law, significant taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reductions for nearly all taxpayers. These cuts included marginal rate reductions, the introduction of a new 10% tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. , an expansion of the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , and a variety of other provisions. Both bills were passed using a Senate procedure known as “reconciliation” – a tactic that lowers the threshold for cloture to a simple majority of Senators (as opposed to a 60-vote supermajority.) This procedure, under the Congressional Budget Act, is not allowed for any bill which affects budget deficits beyond a ten-year window, so these tax cuts included a “sunset” provision which caused them to automatically expire at the end of 2010, in order to bypass that requirement.

Throughout 2010, the President, and factions in Congress proposed various policy options to address the imminent expiration, ranging from letting them fully expire, to extending them partially for taxpayers under a certain income threshold, and full extending them. Finally, in December, a compromise was reached that extended them for an additional two years until the end of 2012.

Below, see a selected list of the tax increases that could occur on January 1, 2013. These are only the most well known provisions of the Bush tax cuts that, if allowed to expire, would come to the immediate attention of the nation’s taxpayers.

  • The two “marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. elimination” provisions will expire, so that:
  • The standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for married couples will fall, no longer double what it is for single filers; and
  • The ceiling of the 15% bracket for married couples will fall, no longer double what it is for single filers
  • The 10% tax bracket will expire, reverting to 15%
  • The child tax credit will fall from $1,000 to $500
  • The tax rate on long-term capital gains earned by middle- and upper-income people would rise from 15% to 20%
  • The tax rate on qualified dividends earned by middle- and upper-income people would rise from 15% to ordinary wage tax rates
  • The 25% tax rate would rise to 28%
  • The 28% rate would rise to 31%
  • The 33% rate would rise to 36%
  • The 35% rate would rise to 39.6%
  • The PEP and Pease provisions would be restored, rescinding from high-income people the value of some exemptions and deductions

The plan outlined in the Obama administration’s budget is to allow only one of those 12 provisions to revert exactly to what it was in early 2001:

  • The top tax rate will revert from 35% to 39.6%

Four of those major provisions will change, but they won’t go back to exactly what they were in 2001:

  • The rate on long-term capital gains will revert to 2001 law (rate of 20%) but only for couples with over $250,000 in AGI the year the gain is realized ($200K threshold for singles)
  • Dividends will be taxed as capital gains until AGI exceeds $250,000 ($200,000 for single filers)
  • The upper portion of the 33% tax bracket will revert to 2001 law (rate of 36%) and the income threshold where that bracket starts will shift up to $250,000 in AGI minus two personal exemptions and a standard deduction (couples), and $200,000 in AGI minus one personal exemption and a standard deduction (single filers), all indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. using 2009 as the base year.
  • The PEP and Pease provisions will be restored, rescinding from high-income people the value of some exemptions and deductions, but the income threshold where they start to pay more will shift up to $250,000 in taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. (couples) and $200,000 for singles

The other major Bush tax cut provisions for individuals listed above will be preserved as enacted during the Bush years.

There are many other provisions that will expire, including EITC eligibility levels, education IRA provisions, and others, not to mention Obama’s biggest tax cut, the making-work-pay credit, which was a one-year tax cut in 2009 that was renewed for 2010. See the complete roster.