Confusion mounts over possible end to tax cuts

If you pay taxes in America, you're probably confused.

Pros who give advice to taxpayers are, too.

"We tell them we don't know, either," said Steve Houlik, executive vice president of tax services for Allen, Gibbs & Houlik in Wichita.

You're being held hostage by election-year politicking in Washington, D.C. The stakes are high and affect everybody.

They center on the tax cuts that were put into place in 2001 and 2003, and are set to expire Dec. 31.

No one on Capitol Hill proposes allowing all the tax cuts to expire. But if gridlock prevails and they do, the average middle-income family in Kansas could pay $1,546 more on income of $62,462 in 2011, according to the Tax Foundation, a research group in Washington, D.C.

Another estimate, from tax consulting firm Deloitte Tax, says a typical family of four in America with an annual income of $50,000 could pay $2,900 more in taxes. A family making $100,000 a year could see taxes rise by $4,500. A family making $500,000 a year could pay $10,800 more in taxes.

If the tax cuts do expire, "We've raised taxes on a lot of hard-working Americans in a recession, and I think that's a bad thing to do," Houlik said.

If tax cuts expire

If the tax cuts expire, taxes would revert to pre-2001 levels on a host of items, including paychecks, capital gains, dividends, estates and deductions for married couples.

The highlights:

* Individual income tax rates would increase from the current range of 10 to 35 percent to a range of 15 to 39.6 percent.

* Provisions that eliminated marriage penalties would expire, meaning married couples will pay higher taxes.

* The child tax credit would fall from $1,000 to $500.

* The tax rate on long-term capital gains would rise from 15 percent to 20 percent.

* The tax rate on qualified dividends would rise from a high of 15 percent to ordinary wage tax rates.

* The estate tax would be restored at 2009 levels, with an exemption level of $1 million and rates that top out at 55 percent.

Debate over cuts

The debate isn't over whether the cuts should be extended, but whether they should be for all taxpayers.

President Obama proposes to extend them for lower- and middle-income taxpayers, but let them expire for single taxpayers making $200,000 or more, and joint filers making $250,000 or more. He and his supporters argue that extending cuts to the wealthiest would continue to increase budget deficits.

The U.S. Treasury Department estimates that extending all the tax cuts would swell the national debt by almost $3.7 trillion over the next decade. Allowing the reductions for the wealthiest 2 percent to expire would narrow that loss to just under $3 trillion by raising $679.6 billion in new revenue from the wealthy, the department estimates.

Republicans, and some Democrats, want the cuts extended for all taxpayers, including those at the highest income levels. They contend that allowing taxes to rise for anybody in a fragile economy that is trying to squirm out of a recession is wrong.

They say that raising taxes for the wealthy, who own small businesses and employ millions of workers, would do more damage to the economy.

Owners of small businesses often pay taxes at individual income tax rates rather than corporate rates. Increasing rates would make them reluctant to hire and invest, they say.

Democrats contend that higher rates would affect fewer than 3 percent of small businesses, and that an increase of only a few percentage points in tax rates is unlikely to discourage entrepreneurs.

At the end of the week, a group of GOP senators floated an alternative approach to extend all the Bush cuts for two years. They argued that would give the economy time to improve and Congress a window to tackle tax reform as part of a broader effort to restore the country to fiscal health.

Candidates weigh in

Both candidates for the 4th Congressional District seat favor extending the Bush-era cuts for everyone.

"I can't understand a federal government that would raise rates in the middle of a recession," said Republican candidate Mike Pompeo.

"In the early '80s, we had the same debate about marginal tax rates. We reduced those rates and did create jobs.

"We're in the same place, save for the fact that here in Kansas there's an awful lot more unemployment, so the problem is even more magnified.''

Democratic candidate Raj Goyle, in a break from Obama, also wants the cuts extended for all, including the wealthiest.

"People are sitting on capital. They're not sure what's around the corner,'' Goyle said. "I think leaving the system in place for everyone right now is the right thing to do.

"We need stability in the economy so we can grow more certainty, and grow more jobs."

Rep. Jerry Moran, the Republican candidate for Sam Brownback's U.S. Senate seat, said one of the best ways to stimulate the economy is to lower taxes on families and businesses.

"Some Democratic leaders want to pick and choose who will benefit from extending the tax cuts, but the reality is that all American families and businesses will benefit from lower taxes," Moran said in a statement e-mailed to The Eagle.

Moran's Democratic opponent, Lisa Johnston, favors extending the cuts for working-class Americans. She warned that the nation has to keep in mind that cuts would grow the deficit.

"I do think it's reasonable to consider that cuts be rolled back for only the wealthiest individuals," she said. "The fact is, while we need to watch spending, we do have a revenue problem that's going to continue to exacerbate the deficit if we don't do something."

Stress of uncertainty

The uncertainty over how the battle will be resolved, and when, is adding to the stress of taxpayers trying to decide what moves to make in the waning months of the current calendar year to minimize their tax liability.

"It's hard for Joe Taxpayer and his advisers to plan when we don't know what Congress is going to do," said Houlik, whose firm is recommending that clients plan dual strategies, depending on whether some or all of the cuts are extended or expire.

Houlik said he doesn't expect a resolution until after the November election, giving taxpayers little time to act.

"Then what's going to happen is, there's going to be a fire drill in December," he said.