Potential Tax Changes on the Horizon

Jan 17 2010

Potential Tax Changes on the Horizon

While we don’t yet know just how much taxes are expected to increase with Democrats controlling Capitol Hill and President Obama in the White House, it’s safe to say that no one is expecting anything in the way of tax cuts over the next few years. Massive government spending combined with lower income tax revenue due to high unemployment and low wages makes raising taxes a necessity at some point and 2010 could be the year where some of these changes take place.

Some of the taxes that have been proposed and are being debated will affect almost everyone while others target specific industries or groups of taxpayers. None of these taxes have been written into the tax code just yet, but there’s a good chance that at least some will find their way into law over the next couple of years.

Tax Banker Bonuses: Bank CEO’s spent last Thursday on Capitol Hill being grilled by lawmakers about how they could have possibly mismanaged themselves so badly during the financial crisis. Ironically, in the same session bankers defended their hefty compensation packages and justified executive bonuses by saying that it would be impossible to retain talent without them. Banks that have repaid the taxpayer funds that rescued them last year are free to pay bonuses as they see fit, but lawmakers aren’t going to feel too bad about taxing these bonuses heavily. There aren’t many historic examples of bonuses in a particular industry being taxed, but this is one potential tax that is likely to become a reality.

Increase Medicare Tax: With healthcare continuing to be a hot topic among lawmakers, one of the proposals on the table is to raise Medicare taxes for high-income earners. Currently, all wages are taxed at a 2.9% rate for Medicare, with the employer and the employee splitting the tax bill. A new proposal would take individuals and families in the top tax brackets and increase the amount of Medicare tax they pay on every dollar that they earn.

Tax Offshore Profits: Many corporations love the idea of operating and generating revenue overseas because the income earned is not taxed unless it’s brought back to the United States. The government needs to find more tax revenue somewhere though and offshore operations would be an easy target for lawmakers to rely on for more tax revenue. Instead of being able to defer taxes on profits earned overseas, corporations would be asked to report and pay taxes on foreign revenue every year.

Tax Financial Transactions: One of the proposals that would affect many taxpayers is one that would add an excise tax to a wide variety of financial transactions. With investments, there would be a tax to consider for every purchase or sale of securities on top of the taxes that are collected on dividends, interest, and capital gains. The taxes collected on long term capital gains and dividends are also likely to increase over the next few years after being cut to 50% for all taxpayers during the Bush administration.

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