The Tax Foundation has provided indepth insight into the looming expiration of the Bush tax cuts looming with billions of dollars in tax cuts are set to expire in January if nothing is done, and tax policy in Washington has been and will continue to be busy in 2012. With all of this action comes many questions about what is actually going on.
This page is designed to “set the scene” for the general public, policymakers, and media with unbiased information relating to the current state of the federal tax system and what is set to happen. If you have any questions that are not answered, e-mail us and we will consider adding them to the list. (Note: We do not answer specific personal tax questions.)
- How much did the Bush tax cuts cost the Treasury in foregone revenue?
- Who received the biggest tax savings from the tax cuts?
- Why were the tax cuts temporary (i.e. not made permanent) when they were passed in 2001 and 2003?
- What is going on with President Obama’s tax cuts, specifically those in the so-called stimulus bill?
- How does this all interact with the Alternative Minimum Tax (AMT)?
- What are PEP and Pease, and how were they affected by the tax cuts?
- Can you provide a complete list of the tax provisions expiring at the end of this year (2010)?
- Do you have a chart showing how the various scenarios (tax cuts expiring, tax Cuts extended, and Obama’s proposal) would affect key tax parameters like tax rates and brackets, the standard deduction, etc.?
- How does the recently passed health care bill interact with all this?
- How can I figure out how much my own tax bill would change as a result of the Bush tax cuts expiring?
Fate of Bush Tax Cuts Uncertain As Expiration Approaches
In 2001 and 2003, Congress passed, and the President signed into law, significant tax reductions for nearly all taxpayers. These cuts included marginal rate reductions, the introduction of a new 10% tax bracket, an expansion of the child tax credit, 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 penalty elimination” provisions will expire, so that:
- The standard deduction 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 inflation 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 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.