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KEY POINTS
- US taxpayers will pay more tax.
- Personal taxes increase across the board.
- Deductions for equipment purchases.
- Cost of healthcare reform.
The June Budget and subsequent Finance Bill in the UK set out some of the draconian measures that the coalition Government has brought in to deal with country’s economic state. Some of these measures are delayed, such as the increase in the VAT rate to 20% in January 2011.
It will be of little comfort to many people, but the fact is that we are not alone. Unless there is a radical improvement in the economic situation, then the new United States Congress will introduce a whole raft of tax increases for American citizens at the beginning of 2011.
Estate tax
Until the end of year 2010 the federal estate tax is zero, following the package of broad-based tax cuts that President George W Bush pushed through to get the US economy moving earlier in the decade.
However, as of midnight on 31 December 2010 the death tax returns at a rate of 55% on estates of $1 million or more.
Personal taxes
Many other tax cuts remaining from the Bush administration will disappear. A new set of taxes will materialise, and it is not only the rich who will pay.
The lowest bracket for personal income tax increases by 50% from 10% to 15%. The next lowest bracket rises from 25% to 28%, and the old 28% bracket becomes 31%. At the higher end, the 33% bracket rises to 36% and the 35% bracket increases to 39.6%.
The marriage penalty also makes a comeback and the capital gains tax rate will jump 33% from 15% to 20%. Tax on dividends increases by a massive 164% from 15% to 39.6%.
It appears that the failure to index the alternative minimum tax will subject 28.5 million families to tax in 2011, up from four million in 2010.
Capital gains tax and dividend taxes will increase further in 2013 as the health care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year and joint filers making more than $250,000.
Other tax hikes including halving the child tax credit to $500 from $1,000 and fixing the standard deduction for couples at the same level as it is for single filers.
Abolition of the Bush cuts will cost taxpayers $115 billion in 2011 alone, according to the Congressional Budget Office, and $2.6 trillion in total by the end of year 2020.
Other provisions
The Internal Revenue Service now has the power to disallow perfectly legal tax deductions and arrangements simply because it judges that the deduction lacks ‘economic substance’. It must have discussed the ‘Ramsay’ doctrine with the HMRC in England.
Currently small businesses can normally treat equipment purchases up to $250,000 as an expense, rather than claim a depreciation allowance. Claims to deduct these as an expense may now be made only up to $25,000. Larger businesses can currently treat half of their equipment purchases as a current tax deduction. From 1 January 2011 all such purchases will have to be depreciated for tax purposes.
The cancellation of the research and experimentation tax credit will be a big loss to businesses.
A tax deduction for tuition and fees will no longer be available and there will be limits placed on education tax credits.
Teachers will not be able to deduct their classroom expenses, and employer-provided educational aid will be restricted. Thousands of families will no longer be able to deduct student loan interest.
Future tax initiatives
This is not the end of the matter. The second wave of tax hikes, as Americans for Tax Reform put it, are designed to pay for the healthcare reform and include:
- The medicine cabinet tax. Americans will no longer be able to use health savings accounts, flexible spending accounts or health reimbursement pre-tax dollars to purchase non-prescription over the counter medicines, apart from insulin.
- The health savings account (HSA) withdrawal tax hike. The healthcare reform increases tax on non-medical early withdrawals from an HSA from 10% to 20%, disadvantaging them relative to individual retirement accounts and other tax-advantaged accounts, which remain at 10%.
- Brand name drugs tax. Makers and importers of brand-name drugs will be liable for a tax of $2.5 billion in 2011. The tax increases to $3 billion a year from 2012 to 2016, then $3.5 billion in 2017 and $4.2 billion in 2018. Inevitably, drug companies will pass on the extra costs to patients in the form of higher prices.
In addition there will be a tax on Americans who decline to buy healthcare insurance. The administration initially stated that this was not a tax, but has since argued in court that it is. Beginning in 2013 there will be a 3.8% Medicare tax imposed on real estate transaction by wealthier Americans.
Conclusion
So your rose-coloured spectacles told you that it was better for taxpayers on the other side of the Atlantic.
Think again!
