Proposed Tax Changes: Will You Pay More Or Less?

By Claire Bradley | October 08, 2010 AAA
Proposed Tax Changes: Will You Pay More Or Less?

In this world, nothing is sure but death and taxes, Benjamin Franklin famously quoted. Franklin didn't live in the 21st century, however, when even taxes are uncertain, with the tax code forever changing. It's hard to keep up with how tax changes affect your personal financial situation. Here's a simple breakdown of different situations that are affected by these proposed changes, so you know if you'll be paying more or less. (For related reading, take a look at The 10 Most Common Tax-Filing Mistakes.)

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If You're Working
We all work hard for the money, and paying Uncle Sam is not easy on the wallet. To help out working Americans, the government has come up with credits, but also tax increases to fight the deficit.

If you're a single filer, earning more than $200,000, or married earning more than $250,000 you will pay more. Proposed legislation will increase the top two brackets from 33-35% to 36-39.6% respectively, starting in 2011. If you're a single filer making less than $75,000, married making $150,000 expect to pay less. The Obama administration proposes to extend the Making Work Pay credit that was part of the economic stimulus packet, so you'll have an extra $400. (Learn more about the credit in New Tax Breaks That'll Help You In 2010.)

If You're a Parent
Kids are expensive, let's face it. There's food, clothing, childcare - but at least you get that tax break, right? Some of these breaks might change, however, so be sure to pay attention to see if some of them expire.

If the proposed child tax credit threshold reverts back to the $12,700 it was before 2009, you'll likely pay more. Currently, you can claim a credit of 15% of income over $3,000, a big bonus to an estimated 11 million people whose refunds will be reduced if the credit reverts to the higher threshold.

However, if the threshold for the child tax credit remains at $3,000, as proposed by the Obama administration, you will likely pay less. Families with three or more children will also pay less if proposed Earned Income Credit benefits become permanent, as proposed by the government.

If You're Saving for Retirement
Saving for retirement is important, something the government recognizes by giving you a tax break. Some legislation is proposing to change current benefits, so pay attention if you're saving for retirement

You'll probably pay more if your tax liability (that's your tax bill, in plain English) is more than $1,000. Current laws that are to expire allow you to take a tax credit of $1,000, but it's non-refundable, meaning that you don't get an IRS refund if your bill is less than that. However, proposed legislation will allow you to deduct 50% of your contribution, up to $500, but it's refundable. So even if you're expecting a refund, if you contributed $1,000 or more to your retirement nest egg, you get $500 from Uncle Sam - amounting to a 50% return on your IRA investment courtesy of the government.

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If You're Paying for College
There are some great tax benefits when it comes to going to college. Whether it's you going back to school to learn some new skills, or your college-bound teen, the government wants to lend you a financial hand. (Learn more about how to cover the bill in 7 Last-Minute Ways To Pay For College.)

You can expect to pay more if current legislation expires. The American Opportunity Tax Credit allows you to take up to $2,500 in tax credits right now, which will revert to the less-beneficial Hope Tax Credit by 2011.

If legislation passes, the IRS will allow you to take a tax credit of 100% of the first $2,000 paid for tuition, books and required course materials, and 25% of the next $2,000 - so a maximum credit of $2,500. Since post-secondary education is so expensive, if higher education is on your menu past 2010, cross your fingers for the American Opportunity Tax Credit to become permanent.

If You Have Capital Gains or Dividends
Currently, your qualified capital gains and dividends are taxed at 15%, or zero if you're in the lower two tax brackets of 10-15%. Laws regarding taxation will revert back 20% for capital gains, and at ordinary income tax level for dividends.

Expect to pay more if proposed legislation does not go through, particularly if you're in a higher tax bracket. Your bill might be less if you're in the 25% income tax bracket or higher and have dividends to report. Proposed legislation will tax dividends at 15% for those in the 25-28% bracket, and at 20% for those in the new 36-39.6% brackets - so better than being taxed at your income tax bracket. (Learn more in Tax Effects On Capital Gains.)

The Bottom Line
Are all these numbers making your head spin? Be sure to check with your tax advisor on how legislation will affect your tax return. Most proposed changes are designed to keep economic stimulus tax breaks in place longer, while shifting more tax burden to top-earning Americans. For the majority of the country - the middle and lower class that are raising kids, going to work, and paying for college - proposed legislation will make April 15 a little easier on the wallet. (Don't miss the other tax changes that are coming. Check out 8 Tax Cuts Set To Expire In 2011.)

For the latest financial news, check out Water Cooler Finance: The Post-Stimulus Slump.

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