What Does The Tax Cut Rollback Mean For You and Your Business?

During the Bush administration in 2001 and 2003, several tax cuts were proposed and passed. Some of them will expire at the end of 2009. Several others are due to expire in 2011. Republicans are facing strong opposition to passing even small-proposed tax cuts this year. Al Hubbard also expressed concern about tax cuts not being a permanent feature in the present Bush administration. In short, it is very unlikely Congress will renew the tax cuts of 2001/2003 after their expiries much less make them permanent. Indeed, with rising costs of the Iraq war, the devastating effects of the Katrina and other such serious blows to the US economy, arguing for tax cuts is getting to be an almost impossible task.

The tax cuts set to expire will of course translate to a higher tax rate for those affected by these taxes. A preview of the tax cuts scheduled for expiration will explain in detail the consequences that the end of these tax cuts will have.

• Individual income tax – The most consequential tax cut that will see its end in 2011 is the individual income tax cut. These tax cuts will affect over five million Americans. Billions of dollars will be paid extra in the form of income tax. A family of four that earns $50,000 today will pay $2,154 extra income tax in 2011. This means a 155 % higher tax bill. Someone making $ 60,000 will dish out $1,863 in 2011, which translates as a 61% increase in the tax rate. While today’s individual income tax rates are 10%, 15%, 25%, 28%, 33% and 35%, in 2011, they will revert to 15%, 28%, 31%, 36% and 39.6%.

• Marriage penalty – Congress changed the laws to make a provision for married couples to file in a manner similar to individuals in 2001. As a result, Couples did not need to pay any more than they would if they filed their taxes as individuals. This cut will expire in 2011. Married couples will have to pay higher taxes on their incomes.

• Child Credit - Credit for children below the age of 17 years went up by $100 in 2001 and so touched the $ 600 mark. From 2005 to 2010, the child credit offered by the State further increases to $1,000. This child credit facility will expire in 2011 and bounce the benefit offered as child credit back to $500.

• Capital gains – The tax charged on the money gained by an individual or a firm when they sell an assets decreased from 10% and 20 % to only 5% and 15 % in the year 2003. In fact, the 5 % capital gains tax paid by those in the lower income group completely dissolves in 2008. However, at the end of the year 2009, the tax cut expires and capital gains tax will revert to the original 10% and 20 % in 2010.

• Dividend tax – Dividends were excluded from the normal income tax section and a reduced rate of 5 % and 15 % was charged on dividend incomes. Until 2008, the lower income group shall be charged zero dividend tax. Sadly, in 2009 this cut sees its end and dividend gains shall be considered as income and taxed under normal income tax rates.

• Alternative minimum tax – The AMT is applicable to individuals as well as corporations. If a corporations /individuals, tentative minimum tax is higher that the tax paid by them, then the AMT is applicable to them. The AMT exemption was raised to $42,250 and $58,000 for individuals and couples respectively. In 2006, however, the exemption reverted to $33,750 for individuals and $45,000 for couples.

With the tax cuts discussed above coming to their end in 2011, there are bound to be several implications in store. Both the individual and the corporate sector can benefit highly if they comprehend these tax cuts and seek professional advice on how to gain from them while their tenure lasts. Those contemplating the sale of their companies or firms must especially move quickly. Once the capital gains tax cuts expire, they will have to dish out a lot more in terms of tax to the government. Disposing of a company can take anywhere between nine to twelve months. If one is to make use of the existing tax cuts, it is essential to start the process right away. Beginning with capital raising to an outright sale of the company - everything will be affected by the tax cuts seeing their last in 2011.

Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, email him or visit www.vercoradvisor.com.