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2001 TAX LAW SUNSET EFFECTS ON THE AMERICAN TAXPAYER.


This tax alert will affect all of our clients:

On January 3, 2001, the 107th Congress commenced. During this session, the bill known as H.R. 1836 was passed out of Congress and signed into law by President George H. Bush. The 2001 Tax Act made many changes in the U.S. Tax Code, broadly affecting the current tax rates, the estate tax provisions and retirement planning. Subsequently, in 2003 and 2004, additional changes were made. Because these bills were mostly enhancements to the original 2001 Act many of their changes to the Tax Code were given sunset provisions as well.

On December 31, 2010, many parts of our current tax laws will go back to the laws in effect in the calendar year of 2000. In other words, it will be the laws in effect 11 years ago!! In this article, we will compare 2009 tax returns to their 2011 versions by taking the 2009 numbers and putting them into tax year 2000 software modified for current law provisions that are not subject to sunset. The areas that concern this writer are tax rate changes, the alternative minimum tax (AMT) increase and the child tax credit rollback. Four 2009 tax returns have been selected from the client files at this firm. One represents a single, lower middle class wage earning person. The second is that of a middle class married working couple with one parent dependent at home. The third one is that of a married couple (moderate income) with several children and both parents working with large itemized deductions. A fourth scenario is that of a retired couple with modest earnings from a mix of retirement plans, with both on social security. Great effort has been made to prevent any form of release of clients’ information.

Various state income tax increases will accompany the federal tax increases as well. No attempt to project this second head of this two headed hydra monster is possible at this time as this practice is nationwide in its client base.

Finally, the tax change rollbacks the tax return examples will try to address are: tax rate increases, the loss of one half of the refundable child tax credit, the decrease in student loan interest deductions, the loss of the age 50 plus IRA contributions limits increase, the loss of popular itemized deductions and adjustments to income, the loss of marriage penalty relief (Married couples will once again be penalized by the tax code for working) and the HUGE increase in middle class exposure to the Alternative Minimum Tax (AMT). So, here we go. Oh, by the way, please share these articles with as many folks as you like, but, please understand that they all have copyrights for 2010 in the name of the author. And another ‘by the way’, all of the dozen or so “tax increase calculators” are worth what they cost you: nothing.

Scenario 1: A single 40 or so person in outside sales who has lots of itemized non reimbursed employee business expenses, rents an apartment and has a salary of around $41,000.

2009 Tax Paid:$2,564.00  PERCENT OF INCREASE: 23.87%
2011 Tax projected:$3,176.00
Tax Increase:$ 612.00


Scenario 2: John and Jane Doe, married, in their late 50’s, no children. Both are wage earners and they own a modest 2 BR, 2 bath brick home. Both have five year old autos. One dependent - an aging parent. Combined incomes of $82,000.

2009 Tax Paid:$7,321.00  PERCENT OF INCREASE: 30.10%
2011 Tax projected:$9,525.00
Tax Increase:$2,204.00


Scenario 3: Two married teachers with two children, ages 9 and 10, with a large amount of itemized deductions. Joint household income is $77,000. Note: in 2009 there is no AMT, but in 2010 there will be due to the minimum tax disallowance of itemized deductions. Both children qualify for a child tax credit.

2009 Tax Paid:$2,599.00  PERCENT OF INCREASE: 182.76%
2011 Tax projected:$7,349.00
Tax Increase:$4,750.00


Scenario 4: Retired couple in their 70’s with mixed fixed income, including social security, live in modest home with no mortgage. Take standard deduction. Income is about $83,000.

2009 Tax Paid:$8,116.00  PERCENT OF INCREASE: 39.61%
2011 Tax projected:$11,331.00
Tax Increase:$3,215.00


As you can see, no one is going to be able to make it through this unscathed. The biggest hits will be taken by seniors and working couples. So, folks, these are real numbers! Put them into the mixer for 2011 with huge increases in payroll tax withholding for Obamacare, additional substantial losses of jobs due to business tax increases and mandatory Obamacare premiums, as well as the current plans to confiscate all privately owned retirement plans next year, and you have the makings of a financial melt down the likes of which will make 1929 look like child’s play.

Ron.