Posted by: SWL | December 31, 2011

Expiring Tax Breaks Will Hit Middle Class Hard

There was such noise over how to pay for an extension of the payroll tax holiday that most of us did not hear that there are 58 other tax credits or incentives that expire tonight.

Some of these have a very limited group of beneficiaries, but are useful:
* Mine rescue team training credit
* Railroad track maintenance credit
* American Samoa economic development credit
* An expansion of the adoption credit

Others that benefit a small group of citizens seem wasteful:
* faster depreciation rates for NASCAR race tracks
* credits for electric motorcycles and three-wheeled vehicles

Many could deeply affect small businesses:
* Employer wage deduction for activated military reservists
* Enhanced charitable deductions for companies donating book inventories or computer equipment to schools
* credits for hiring welfare recipients, veterans, ex-convicts and others who have trouble getting hired

“Regular” Americans will pay higher taxes if these breaks are not renewed:
* Tuition credits
* State and local sales tax deduction (My family had approximately a $300 itemized deduction for this in 2010.)
* Mortgage insurance premium deduction
* Credit (up to $250) for teachers who buy classroom supplies
* Residential energy credits

The most costly break that expires is the “patch” to the Alternative Minimum Tax. Congress keeps passing a temporary repair to the AMT without coming up an inflation-adjusted permanent fix. If nothing is done, Americans will pay an additional 26-28% on all income over an adjusted gross income of $45,000 (married, filing jointly). Currently the extra tax applies to adjusted gross income over $74,450. (Current threshold for single filers = $48.450; would go down to $33,750)
If a family’s adjusted gross income [bottom line of page 1, form 1040] is $50,000, they could pay an AMT of 26-28% on $5000. That could cost them $1300 or more. This is more than the extra $1000/year in their paychecks from the payroll tax holiday.
This would hit the middle class hard. (For reference, the 2011 federal poverty level was $22,350 for a family of four; those in various federally funded assistance programs qualify up to $27,938.) If many of these tax breaks are not renewed, the middle class will pay far more than their “fair share”, even under my definition of “fair”.

For the list complied by Joint Committee on Taxation (1/21/11) of tax breaks that, without Congressional action, will expire in 2010 through 2020, click here.

This has renewed calls for a flat tax with minimal deductions and credits. It would certainly be a worthy subject for national debate. Even if the bottom line on the tax form remained the same for most taxpayers, we would gain by having to spend less time filling out our tax returns and the government (and thus all of us) would save money because fewer IRS employees would be required to process tax submissions every year.

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