More On Tax Planningfrom The Advisor's Professional Library
- IRAs: Eligibility The eligibility rules for contributing to traditional and Roth IRAs are complicated. Learn how to effectively use them in retirement plans.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
President Barack Obama on Monday asked Congress to take up legislation that extends for one year the Bush era tax cuts for families earning less than $250,000 annually.
The nation’s biggest challenge right now, Obama said in comments from the White House on Monday morning, “isn’t just to reclaim jobs, but to reclaim the security that so many middle class have lost over the past decade.” A “strong middle class,” he said, “is what I believe spurs the economy,” not more tax cuts for the wealthy.
Said Obama: “That’s why I cut have middle class taxes every year since I’ve been in office. Let me repeat: we have cut taxes by $3,600 for the average middle class family since I’ve been in office.”
The nation, Obama said, doesn’t need “more top down economics” as Republicans have championed. Instead, he said, “we need policies that support the middle class.”
However, Republican leaders have said that within the next couple of weeks they would take up legislation to extend the Bush tax cuts for everyone, including those earning more than $250,000.
What’s holding the nation back in rebuilding the economy, Obama argued, “Isn’t a lack of a plan or ideas but a stalemate in Washington on which direction we should go as a country,” and there’s no greater issue on which that “stalemate is pronounced than on the issue of taxes.”
If Congress fails to pass legislation that extends the Bush tax cuts for those earning less than $250,000 per year, 98% of Americans would see their taxes go up by $2,200 starting next year, Obama said.
What’s more, he continued, 97% of small business owners fall under the $250,000 threshold. While Republicans maintain that letting the Bush tax cuts expire for the wealthiest means taxing the “job creators,” Obama said, “I don’t believe that. We all know that small businesses create the most jobs.”
As soon as Congress passes a bill extending the tax cuts for the middle class, Obama said, “then we can have a discussion about whether to extend the tax cuts for the wealthiest Americans” and “decide how to reform the entire tax code.” Right now, Obama said, “middle class families and small businesses should be given the security they deserve” because “they are driving the recovery forward.”
But what about security for the other 3% of businesses? asks Chris Bergin, president of Tax Analysts. “I suppose this is smart politics: give me what I want now and we’ll have a discussion and hopefully you’ll never get what you want later,” Bergin told AdvisorOne in an interview. “Our President has learned that the tax system in Washington is now an apparatus for creating winners and losers.”
Creating certainty for 97% of the small businesses is creating “security for some and not others, which is not security at all,” Bergin says. “I don’t know how the President can talk about security when our tax code is dominated by expiring provisions.”
What happens to the payroll tax cut that expires come January? Bergin asks. “I’m sure that’s one thing [the President] calculates when he says he’s lowered taxes for the middle class.” How about the Alternative Minimum Tax (AMT) that will end and “gobble up the middle class” unless there’s a temporary patch.
Sen. Orrin Hatch, R-Utah, ranking member of the Senate Finance Committee, said after Obama’s comments that instead of “trying to pick a needless fight,” the President should recognize that there’s a bipartisan consensus to prevent all the tax increases that are set to hit on January 1, 2013, by extending all the tax relief a full year during which time comprehensive tax reform should take place.
“It’s hard to miss that it’s a Presidential election year. But, as last week’s jobs numbers show, too much is at stake for the President to be playing politics with our economy,” Hatch said in a statement. “Instead of trying to pick a needless fight with Congress, the President should recognize that there is a growing bipartisan consensus to prevent all the tax hikes from hitting every tax-paying American on January 1 that could push our economy back into a full-blown recession.”
But Senate Majority Leader Harry Reid, D-Nev., said that he agrees with President Obama that the middle income tax cuts should take effect “immediately,” as it will "protect middle-class families and allow us to reduce our deficit in a responsible manner.”
Democrats and Republicans, Reid said in a statement, “should be able to agree that protecting the middle class is the most important priority, so Republicans should stop holding these middle-class tax cuts hostage to extract more reckless giveaways for millionaires and billionaires.”
Reid said he would be discussing “the next steps” on the middle class tax cut in the Senate in the coming days. “Republicans have claimed they want to reduce our deficit; in the weeks ahead, they will have a chance to do so by joining Democrats to vote to extend tax cuts for all middle class American families on the first $250,000 of their income."