Despite President Obama's effort to sideline discussions on raising taxes until the 2012 elections, financial consultants are already warning clients to prepare for a major boost if a long-term deal on the Bush tax cuts isn't agreed to by the end of 2012. Republican leadership advisers report that some members are already receiving calls from constituents worried about the upcoming tax changes, adding that the warnings could prove a political plus for the GOP as it enters talks later this year with the administration to extend the Bush tax cuts permanently. [See a slide show of the 10 Best Cities to Find a Job.]
Both sides agreed to extend the tax cuts last year but put renewal right in the middle of the 2012 election year. The administration, believing that the economy will have come back by then, figures that it will be able to argue that only those cuts for middle and low-income should be kept and that taxes should surge for wealthy Americans.
But the warnings from financial consultants are apparently scaring middle-income workers and the elderly with retirement accounts, say GOP advisers. One notice from the Charlottesville, Virginia-based financial firm Marotta Wealth Management raised many of the warnings in a newsletter. It read in part: "Up until December 2010, it looked like a tax tsunami was coming. The higher your adjusted gross income, the closer you lived to the coast where the tsunami would hit. Now Congress has hit a two-year snooze button, but you should still safeguard your assets in a lifeboat and avoid getting swamped with future taxes." [See a gallery of editorial cartoons on the economy.]
Then they lowered the boom: "At the end of 2012, the Bush tax cuts will expire and tax rates will go up across the board. Even the 10 percent bracket will rise to 15 percent. There will once again be a marriage penalty on two-income families. A phaseout of itemized deductions and personal exemptions will return. The child tax credit will drop to half. The death tax will be reinstated at 55 percent. The capital gains tax will rise from 15 percent to 20 percent and then to 23.5 percent. Tax on dividends will swell from 15 percent to 39.5 percent. Although the timing of this change has been pushed back, it should still factor into your tax management. Two years is a relatively small tax-planning window through which you should drive a Brink's truckload of savings."