Higher tax rates are going to cost you

By Andrea Coombes, MarketWatch

SAN FRANCISCO (MarketWatch) -- Some Americans likely will find their tax bills rising in about a year.

The George W. Bush-era tax cuts expire at the end of 2010 and the current outlook is that high-income Americans will take the brunt of the pain as income-tax and capital-gains rates revert to higher levels. But experts also say it's highly likely Congress will act to protect middle- and lower-income taxpayers.

"There are no facts about the future but if there were one it would be that the Bush tax cuts for the people below $200,000 a year are going to get extended, and the Bush tax cuts for singles above $200,000 and married couples above $250,000 are not going to get extended," said Clint Stretch, Washington-based managing principal of tax policy at Deloitte Tax, a consulting firm.

Others agreed -- with caveats. "The general sense has been that we are not going to have higher rates for anyone who doesn't make $250,000 or more," said Grace Allison, tax strategist with Northern Trust in Chicago.

"The problem that Congress is going to be up against is that extending the Bush tax cuts for lower- and middle-income taxpayers costs a little over $1 trillion over 10 years," Allison said. "So, basically, it's going to be a very interesting year."

That might be an understatement. In early 2010, President Obama's tax panel, headed by former Federal Reserve Chairman Paul Volcker, is expected to publish its ideas on possible reform strategies.

"That could form the basis for a major tax-reform proposal," said Mark Luscombe, a principal analyst with CCH Inc., a Riverwoods, Ill., tax publisher and unit of Wolters Kluwer. "Of course, we had a tax-reform panel during the Bush administration. It issued its report and it was ignored, so that's always a possibility."

More tax hikes -- and tax cuts

But wait, there's more -- at least for some taxpayers. Proposals to pay for health-care reform, should they come to pass, could bring even higher tax rates for high-income filers. In the House bill, for instance, there's 5.4% surtax on modified adjusted gross income in excess of $500,000 for single filers or $1 million for couples.

And, keep in mind: Some of Bush's tax cuts aren't done phasing in yet. While higher-income filers for years have been subject to a reduction (usually about 3%) in the value of their itemized deductions and personal exemptions, that hit has gotten progressively smaller in recent years, thanks to Bush's 2001 tax law. In 2010, higher-income individuals can take full advantage of itemized deductions and exemptions without facing that reduction. After 2010, that tax hit is back in full swing.

Meanwhile, a number of other tax perks are likely to be extended for 2010, including the deduction for state and local sales tax, the additional standard deduction for real property taxes, the deduction for tuition and educational expenses, and a deduction for teachers' classroom expenses. The House passed the Tax Extenders Act of 2009 on Dec. 9. Until the Senate acts, there's no guarantee what the final law will look like, but experts said those provisions will likely pass.

And the estate tax? It's likely lawmakers will enact legislation to make sure the tax doesn't disappear in 2010 as current law has it doing, experts said. The House passed a bill Dec. 3 that makes permanent the 2009 provisions: a top marginal rate of 45% on estates larger than $3.5 million or $7 million for married couples. Now it's up to the Senate to act. (Current law has the estate-tax rate reverting to a 55% levy on estates worth more than $1 million after 2010.)

Some are predicting Congress will enact a one-year extension of the 2009 law and then revisit the issue in 2010, CCH's Luscombe said.

Capital-gains rates set to rise

Lawmakers are likely to address the demise of the Bush-era income-tax cuts relatively early in the year, some say.

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