This is a reprint from Ahern & Associates. Learn more at http://www.ahern-ltd.com.

As of January 1, 2011 the Kiplinger Report, shows the largest tax hike in the history of America , will take effect;

This is going to impact families, and;

It’s going to impact small businesses in 3 great waves.

FIRST WAVE

In 2001 and 2003, Congress enacted several tax cuts for investors, small business owners and families. The 2001 and 2003 tax relief will expire on January 1, 2011.

Regardless of what the administration has stated, personal income taxes will rise;

The top income tax rate will rise from 35% – 39.6% (this is also the rate at which 2/3 of small business profits are taxed).

The lowest rate will rise from 10% – 15%, and all the rates in between will also rise.

Itemized deductions and personal exemptions, will again, phase out, which has the same mathematical effect as higher marginal tax rates.

A full list of marginal rate hikes is as follows:

The 10% tax brackets rises to an expanded 15%.
The 25% bracket rises to 28%.
The 28% bracket rises to 31%.
The 33% bracket rises to 36%, and;
The 35% bracket rises to 39.6%.

I don’t want anybody to feel left out because there will be higher taxes on marriage and family’s. The marriage penalty (narrower tax brackets for married couples) will return from the first dollar of income;

The child tax credit will be cut in half from $1,000 – $500 per child.

The standard deduction will no longer be doubled for married couples relative to the single level, and;

The dependent care and adoption tax credits will be cut.

The most unfortunate part of the tax hikes are the return of the Death Tax. This year only, there is no death tax. For those dying on or after January 1, 2011;

There is a 55% top death tax rate on the states over $1MM.

A person leaving behind 2 homes, business, or retirement account, will easily pass along a debt tax bill to their loved ones.

The analogy that the Kiplinger Report provided was; “think of farmers who don’t make much money, but their land (which they purchased years ago with after tax dollars) now has substantial value”. They heirs must sell the farm (which may be their livelihood) to pay the estate tax, because they don’t have cash “sitting around” to pay the tax.

Think about your own families assets. Maybe your family owns real estate or a business that doesn’t make much money, but the building or equipment is worth over $1MM;

Upon death, the heirs inherit the first $1MM tax free, but;

If there is a home, stock, cash, of $500,000 on top of the $1MM business;

The heirs will owe the government $275,000 – cash. That’s what I said–$275,000 cash! That’s 55% of the value of the assets over $1MM.

The question is: “Who has that kind of money sitting around waiting to pay estate taxes?”

There is also going to be higher tax rates on savers and investors;

Capital gains tax will rise from 15% – 20% in 2011.

The dividends tax will rise from 15% – 39.6% in 2011.

These rates will rise another 3.8% in 2013.

Did you hear what I said? The dividends tax will rise from 15%, this year to 39.6% in 2011 and, then, the rates will rise again in 2013. Very disturbing information, isn’t it? That’s only the first wave.

SECOND WAVE

Consists of 20 new or higher taxes in the making, and several will go into effect on January 1, 2011, which include;

The Medicine Cabinet Tax.

a.) American’s will no longer be able to use Health Savings Accounts (HSA’s).

b.) They will no longer be able to use Flexible Spending (FSA) or Health Reimbursement (HRA) pretax dollars to purchase non prescription, over the counter medicines (except insulin).

c.) In plain and simplistic terms, you will now pay for these with after tax dollars.

There is a provision in the tax laws for Special Needs Kids’ Tax; The new provisions will impose a cap on Flexible Spending Accounts (FSA’s) of $2,500. Currently, there is no Federal Government limit.

There is one group of FSA owners, for whom this new cap will be particularly cruel and that’s parents with special needs children. There are thousands of families with special needs children in the United States and many of them use FSA’s to pay for special needs education.

Under the revised tax laws, FSA dollars cannot be used to pay for this type of special needs education. Tuition rates at one leading school that teaches special needs children in Washington D.C. ( National Child Research Center ) can easily exceed $14,000 per year.

To add insult to injury, the HSA (Health Savings Account) now has a withdrawal tax hike; Under the administration’s plans, there will be additional tax on non medical early withdrawals from an HSA.

This will increase from 10% – 20%.

This will disadvantage the HSA’s relative to IRA’s and other tax advantaged accounts, which remain at 10%.

Have you had enough? Well get ready, there’s a Third Wave!

THIRD WAVE

We’ve all heard about the Alternative Minimum Tax (AMT) and employer tax hikes. When American’s prepare to file their tax returns in January of 2011, they will be in for a nasty surprise – the AMT won’t be held harmless and many tax relief provisions will have expired.

The major items include:

Small business expensing will be slashed and 50% expensing will disappear – in other words, small businesses can normally expense equipment purchases up to $250,000.

This will be reduced to $25,000.

According to the Left Leaning Tax Policy Center , Congress’s failure to index the AMT will lead to an explosion of AMT taxpaying families, rising from 4 million, last year, to 28.5 million.

These families will have to calculate their tax burdens twice. Pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of tax payers.

Then, we come to the reality of our economy–businesses. There are, literally, scores of tax hikes on businesses that will take place;

Taxes will be raised on all types of businesses, and;

The biggest is a loss of the research and “experimentation tax credit”.

However, there are many, other taxes on the horizon. Combining high marginal tax rates with the loss of tax release will cost jobs.

Had enough? Not yet! There is going to be additional reductions for Education and Teaching;

The deduction for tuition and fees will no longer be available.

Tax credits for education will be limited.

Teachers will no longer be able to deduct classroom expenses.

Coverdell Education Savings Accounts will be reduced.

Employer – provided educational assistance, is curtailed.

The student loan interest deduction will be disallowed for hundreds of thousands of families.

To complicate matters, charitable contributions from IRA’s, will no longer be allowed;

Under the current law, a retired person with an IRA can contribute, up to, $100,000 per year (directly to a charity) from their IRA.

This contribution only counts towards an annual required minimum distribution.

This contribution will no longer be available.

However, don’t worry! Taxes affect all segments of our economy. Now, your insurance will be income on your W2’s. Doesn’t that make you happy?

According to Kiplinger, next year, they believe that 99% of the population has no idea what was included in the new and improved health care legislation. Starting in 2011, your W2 tax forms, sent by your employer, will be increased to show the value of whatever health insurance you were provided by the company;

It does not matter if it’s a private concern or a governmental body.

For people that are retired, don’t worry! Your gross income will be adjusted by the amount of insurance you receive; You will be required to pay taxes on a larger sum of money that you have never seen.

You can take your tax form you just finished and see what $15,000 – $20,000 additional gross income does to your tax debt.

That’s what you will pay next year.

The worst thing, this puts many people into a higher tax bracket, which means more taxes. Are you happy yet?

When you review these tax laws, they are hard to comprehend. These statistics were provided by the Senior Tax Editor of the Kiplinger Letter. You can go to Kiplinger and read about 13 tax changes that could affect you. Number 3 is what I listed above.

The point I’m trying to make, whether you like the tax laws or not, are inconsequential;

You need to plan your business, based upon the new laws.

You need to plan your expenses in your overall budgeting to adjust to the market conditions, and;

You need to work within the system, as part of your business plan, for the next 3 – 5 years.

The economy is not rebounding. Statistics show that unemployment hovers, more at 18%, than at 9.6%, and we are a long way from recovery.

The new tax laws do not stimulate a desire for business to expand. Worse yet, it’s going to be very difficult to borrow money because lenders are concerned about the financial impact to business. It’s a catch 22!