A TAXING CHORE

By Don Shilling

Higher tax rates are coming unless Congress acts by 2010.

As taxpayers struggle through the final days before April 15, lawmakers are working on a different tax deadline.

In two years, a reduction in federal income tax rates and creation of some tax breaks are set to expire. Washington politicians — including the three major presidential hopefuls — have been debating whether to extend “the Bush tax cuts,” which were passed by Congress in 2001 and 2003.

The questions: Can a federal government that spends more than it takes in afford the lower rates? If not, which taxpayers should pay more? If only the rich should pay more, who is that?

How the questions are answered will affect the wallets of just about everyone. A single filer with $50,000 in income paid $14,000 in taxes under the former tax brackets, compared with $12,500 today.

It also affects the federal budget. In its last fiscal year, the federal government rang up a $163 billion deficit. The last time the budget had a surplus was 2001, which was the year the tax cuts were passed and the year a recession started.

In a nonbinding budget vote last month, presidential hopeful John McCain sided with his fellow Republicans in the Senate supporting an extension of the current rates.

Democrats Hillary Rodham Clinton and Barack Obama sided with the majority of their party in the Senate in supporting only some parts of the Bush tax plan — the 10 percent tax bracket for low-wage earners and certain tax credits.

The lowest tax rate would return to 15 percent without a new tax bill from Congress. Other tax rates would rise 3 percentage points, except the highest rate.

The bracket for people earning more than $357,700 a year would rise from 35 percent to 39.6 percent.

On the campaign trail, both Democrats have said they wouldn’t support returning to the old rates for the middle class. Plus, they are advocating new tax credits for the middle class.

Political observers have been trying to figure out who would fall into that protected group. Neither candidate has proposed a detailed plan, but Clinton says she supports raising rates only for those earning more than $250,000 a year. Obama has said he wants to return the top tax rate to 39.6 percent.

McCain has gone a step further in calling for a repeal of the alternative minimum tax, or AMT, which has threatened millions of taxpayers in recent years with large tax increases.

The AMT is a parallel tax system that was designed to make sure wealthy people don’t evade all income taxes through the use of loopholes. As the regular tax rates have fallen, however, more taxpayers are obligated to pay the AMT.

Jim Rosa, a certified public accountant at Hill, Barth & King in Boardman, said the AMT will continue to be a big political issue. Congress in recent years has passed one-year credits that have allowed millions of people to avoid having to pay the AMT, which often would be significantly higher than their regular tax bill.

Without doing away with the AMT or raising the regular tax rates, Congress will be faced with a choice each year — pass the temporary credits or risk outraging millions of taxpayers.

Taxpayers must pay whatever is higher — the AMT or their regular tax bill. The AMT is either 26 percent or 28 percent with few deductions.

The tax applied to only 115 people in 1969, its first year. The New York Times has reported that by 2010 about 30 million Americans will be hit with the AMT, including about 94 percent of married filers who have children and make between $75,000 and $100,000 a year.

More people are affected by the AMT because of the drop in tax rates. The top tax rate when the AMT was passed was 77 percent, more than double the current top rate. In the 1950s and early 1960s, the top rate was more than 90 percent.

Before President Reagan pushed through tax cuts in 1981, wealthy people had to adopt investment strategies that revolved around tax shelters, Rosa said.

The tax code at that time provided liberal tax shelters, which people took advantage of so they weren’t paying 90 percent tax on their earnings, he said.

The shelters included investments in equipment leasing, railroad cars and cattle, he said.

The investments often lost money, but the important factor was to reduce the tax bill, he said. In some cases, a $50,000 investment could allow someone to reduce their tax bill by $200,000, he said.

shilling@vindy.com