At the end of this year, the Bush tax cuts are scheduled to expire.  The current tax brackets range from 10 percent to as high as 35 percent and will revert to brackets ranging from 15 percent to 39.6 percent, which were in effect during the Clinton presidency. There has been talk about the lawmakers doing something before the cuts expire to retain at least some of the middle-income rates and letting the higher brackets expire, thus helping those in middle-income America, but at this point nothing has been done.

Is it a good thing to let these tax cuts expire?  It probably depends on a person’s point of view and political leanings. Many Republicans and those who lean to the right think that letting the tax cuts expire is not a good idea.  They tend to believe in what is called supply side economics. According to Investorwords.com, supply side economics is “An economic theory which holds that reducing tax rates, especially for businesses and wealthy individuals, stimulates savings and investment for the benefit of everyone. Supply side economics has also been referred to as trickle-down economics.”

According to this theory, lower taxes will make it easier for businesses to produce more goods and services at lower prices for the consumer and, thus, will stimulate the economy in a positive way.  Those on the supply side say that the deficit increase is a direct result of out-of-control government spending on politicians’ pet projects and unnecessary programs.

Many Democrats and those leaning more to the left would argue that all supply side theory does is allow those who are rich to get richer by paying lower taxes and it does not really help the economic conditions. They would also say that under the theory of demand side economics, if taxes are lowered they should be lowered on those in the lower-income brackets.  The idea is that those in these lower brackets will spend all of their income and this money will go into circulation and stimulate the economy in a positive way because of this consumer spending. Those in favor of demand side economics would further argue that a reduction in taxes on the rich will drive up the government deficit.

If the tax rates are allowed to expire, how else may it affect you? As mentioned earlier, tax rates for nearly everyone are set to go up. Other effects are higher capital gains tax rates and higher taxes on dividends. The current maximum tax rate on long-term capital gains and qualified dividends is 15 percent. Starting next year, the maximum rate on capital gains will go up to 20 percent, and the maximum tax rate on dividends will climb to as high as 39.6 percent. This will be quite an impact on taxpayers who are in these categories. Also, the current standard deduction for married couples filing jointly is twice the amount for singles.  When the Bush tax cuts expire it could force married couples to pay more in taxes than those who are single. Thus, what is called “the marriage penalty” is reinstated. Other changes will be the phase out of itemized deductions such as mortgage interest and charitable donations for those in higher brackets.

One of the fears for many retirees is that if tax rates go up to help pay down a deficit fueled by war and the bailouts, they will have to worry about making their retirement income go further. This could increase the risk of running out of money. Much of the wealth in our country is located inside retirement accounts, such as 401(k)s, IRAs, etc.  If taxes go up, many Americans need to realize their retirement accounts are right in the cross hairs of many of the government’s tax increases because that is where the money is.

Since tax rates are probably lower now than they will be in the future, it may be time to deal with some of the taxes this year no matter which way you lean.

For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysradio.com. Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC.  The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537.  NEXT Financial Group, Inc. nor its representatives provide tax advice.  Seek the advice of an Accountant.

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This entry was posted on Thursday, August 19th, 2010 at 1:32 pm and is filed under Retirement Guys, Toledo Business Link.
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