Wendell Brock - Thursday, September 30, 2010
Part Three
By Jayme Mendenhall

The Third Wave:  The Alternative Minimum Tax (AMT) and Employer Tax Hikes

The AMT was created in 1969 to ensnare a handful of taxpayers. The AMT operates as a parallel tax system to the regular tax system with its own definition of taxable income, exemptions, and tax rates. It was originally called the "millionaire's tax", in that it targeted only the wealthiest households. The income triggers were not indexed for inflation so as incomes rose the AMT touched more of the middle class. Without periodic Congressional action to temporarily raise the income limits that trigger the AMT, estimates are between 22 and 28 million families will be required to pay the tax now, this is up from 4 million last year.

Taxes will be raised on every business.  Name one business that won’t be affected by the scores of tax hikes that are coming.   The biggest is the loss of the “research and experimentation tax credit,” but there are many others.  Combining high marginal tax rates with the loss of this tax relief will cost jobs. High tax burdens will crush efficiency, creativity and innovation; who can put a price tag on that?

Small business expensing will be slashed and 50% expensing will disappear.  Small businesses can normally expense (rather than depreciate) equipment purchases up to $250,000. This will be cut all the way down to $25,000! Larger businesses can expense half of their equipment purchases.  In January of 2011, all of it will have to be depreciated. 

On page 25 of 29: TITLE IX REVENUE PROVISIONS- SUBTITLE A: REVENUE OFFSET PROVISIONS-(sec. 9001,as modified by sec. 10901) Sec.9002  "requires employers to include in the W-2 form of each employee the aggregate cost of applicable employer sponsored group health coverage that is excludable from the employees gross income."

What this means is that, starting in January, insurance will be income on W2's.  In 2011, W-2 tax forms sent by employers will be increased to show the value of the health insurance given by the company. It does not matter if that's a private concern or governmental body of some sort.  Individuals and families will be required to pay taxes on a large sum of money that they have never seen.  Increasing additional gross income by $15-20 thousand will put many people into a higher tax bracket.  Even retiree’s gross income will go up by the amount of insurance they receive. 

Tax policies that will be changing for education include:

• Tax Benefits for Education and Teaching Reduced
• Deductions for tuition and fees will not be available
• Tax credits for education will be limited
• Teachers will no longer be able to deduct classroom expenses
• Coverdell Education Savings Accounts will be cut 
• Education Savings Accounts will be cut 
• Employer-provided educational assistance is curtailed
• The student loan interest deduction will be disallowed for hundreds of thousands of families

Charitable Contributions from IRAs will no longer be allowed.  Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA.  This contribution also counts toward an annual “required minimum distribution.”  This ability will no longer be there.

The tax tsunami that is headed towards the American public is the largest set of tax increases ever to hit at one time in the history of the United States.  The devastation to our economy is unimaginable at this point and looks to be unprecedented in the annals of our history.   But don’t fear, there are some jobs being made by this administration; they are in the IRS.  So if these new tax hikes hit you hard enough, you may consider finding work there.  It looks like they will be very busy the next few years.

Wendell Brock - Friday, September 03, 2010 
By Jayme Mendenhall

The Second Wave:  Obamacare

There are over twenty new or higher taxes in Obamacare.  Not all of them even relate to health care.  But all of them will have a dire impact on small businesses and our way of life. Several will go into effect on January 1, 2011.  

A business owner and his employees will have to purchase unlimited lifetime coverage and unlimited annual coverage (this requirement phases in between now and 2014).  The Obama administration estimates that these mandates alone could increase premiums for some businesses by 7 percent. (And if it is a government estimate, then you know it is low).

He and his employees will have to purchase coverage for dependent children without any waiting periods for pre-existing conditions.  Another mandate will require them to purchase coverage for dependents up to age 26.  One private estimate puts the cost of this “slacker” mandate an average of 2 percent, but a small-business owner’s premiums may rise even more.  Adversely, the cost may force him to drop dependent coverage entirely.

If his health plan loses its “grandfathered” status (really, what are the odds?) he and his workers will have to purchase 100-percent coverage for a long list of preventive services. The administration estimates this mandate will increase premiums on average by 1.5 percent. (Private estimates are in the range of 3-4 percent.)  According to HHS, these added costs will likely push the small-business owner to change health plans to a plan that complies with the mandates, but tightens restrictions on accessing care.

Owners of health savings account (HSA), medical savings account (MSA), flexible spending account (FSA), or health reimbursement arrangement (HRA), will lose the ability to purchase over-the-counter drugs tax-free (except insulin).  If they make non-medical withdrawals from their HSA or MSA, the penalty will double from 10 percent to 20 percent.

The “Special Needs Kids Tax” provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (currently, there is no federal government limit).   FSA owners for whom this new cap will be particularly cruel: parents of special needs children. Thousands of families with special needs children in the United States use FSAs to pay for special needs education.  This will no longer be permitted.

If the small business is a tanning salon, it is already paying a new 10-percent tax on its sales.

Beginning in 2010, one third of small businesses may be able to get a tax credit that covers up to 35 percent of their health-benefits.  Of course, that credit is not a long-term solution to rising costs; it disappears after 6 years and often sooner.  It will also discourage hiring, because hiring too many workers will reduce or eliminate the credit.

By 2013, all businesses will have to fill out an IRS Form 1099 every time they purchase more than $600 from a vendor.  If a small-business owner owns a trucking company, he will have to ask gas stations for their tax ID numbers.  If the gas stations don’t cooperate, he will have to withhold money and send it to the IRS for gas expenses.  This will be the biggest nightmare in the bill for small businesses. 

If a small-business owner and his wife make over $250,000, they’ll pay the new, higher Medicare “payroll” tax of 3.8 percent, starting in 2013.  (It’s currently 2.9 percent).

2014 is when things really get messy.  That is when the government will require everyone that is still in business to purchase even more unspecified types of coverage, which will cause premiums to rise even higher.

If a small-business owner has 50 or more employees – or fewer full-time employees and lots of part-timers – he faces the prospect of tens of thousands of dollars in penalties under ObamaCare’s employer mandate if he does not provide “adequate” coverage to his workers.  A small-business owner with 55 employees may decide to fire six of them just to eliminate that potential liability.

Penalties may be triggered by factors that are unpredictable and totally beyond the control of a small-business owner.  He could get hit with penalties simply because a worker’s spouse loses or changes jobs; if a worker’s spouse moves out or dies; or if an employee’s parents move in.

If a small-business owner splits his 60-employee business into two 30-employee businesses, then the federal government—maybe the IRS—will start snooping around to determine whether it was done for legitimate business reasons or just to avoid the mandate.

No matter the size of the firm, if the owner or his workers earn around $30,000 to $100,000 and get coverage through one of the new health insurance exchanges, their implicit marginal tax rates will jump from about 30-40 percent all the way up to 60-75 percent!

ObamaCare has created enormous uncertainty.  No one has any idea what ObamaCare’s mandates will cost in 2011, 2012, 2013, or 2014 or what additional benefits will be required.  It is also unknown what kind of insurance options will be available in the future.  All that is known is that these changes will cost more – probably a lot more – and small-businesses will be spending extra time and money on tax accountants and attorneys.

Michael F. Cannon is director of health policy studies at the Cato Institute.

Wendell Brock - Wednesday, August 18, 2010By Jayme Mendenhall

In just a few months, a tax tsunami will hit America. It will hit families and small businesses in three great waves on January 1, 2011. The first of the three waves will be outlined here:

First Wave
Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families.  These tax cuts are all scheduled to expire on January 1, 2011.

Personal income tax rates will rise  
The lowest rate will rise from 10 to 15 percent, which is a 50 percent increase!  All the rates will rise as outlined below. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed).  

Itemized deductions and personal exemptions will be phased out, which has the same mathematical effect as higher marginal tax rates.  The full list of marginal rate hikes is below:

- The 10% bracket rises to an expanded 15%
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%

Higher taxes on marriage and family    
The child tax credit will be cut in half from $1000 to $500 per child.  

The standard deduction will no longer be doubled for married couples relative to the single level.  

The dependent care and adoption tax credits will be cut, which will hurt people who are taking care of parents or children with special needs.

The return of the Death Tax; this year, there is no death tax, for those dying on or after January 1 2011, the highest estate tax rate is 55 percent.  

Higher tax rates on Retirees, Savers and Investors
The capital gains tax on investment income will rise from 15 percent this year to 20 percent in 2011 or an increase of 33 percent. 

The dividends will be taxed as ordinary income, which could push the tax rate as high as 39.6 percent or an increase of 164 percent for those in the top tax bracket. These rates will increase another 3.8 percent in 2013.

At the end of the Clinton presidency the economy was in a recession. It was comparatively mild, but sluggish none the less.  With the Bush tax cuts, the economy rebounded and was renewed again.  If this were the only change to our tax code and our economy we could expect to go back to the sluggishness we were experiencing then; but its not, with these increases we will be plunging deeper into a recession again and this is only the first wave to hit our economic shores.