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DEMOCRATS’ TICKING TAX BOMB, PART IV: Seniors
How Seniors Will Be Affected if the 2001 and 2003 Tax Reductions Are Not Extended
Wednesday, July 25, 2012
As described in Part I of this series, when the clock strikes midnight on December 31, 2012, the low-tax policies originally enacted in 2001 and 2003 – and extended, at Republicans’ urging, by a Democrat Congress and President Obama in 2010 – are again scheduled to expire. This will result in higher taxes for every American who pays income taxes, as well as for small businesses, the engines of job creation. House Republicans have announced plans to hold a vote prior to the August recess on legislation to extend all of these low-tax policies again, while also establishing a pathway to comprehensive tax reform next year. President Obama and the Democrats who control Washington, meanwhile, have made it clear that they are prepared to allow all of these tax hikes – totaling more than $4 trillion over the next decade – to take effect at the end of this year. Part II of this series provided some examples showing how much more in taxes typical taxpayers can expect to pay as a result of this looming tax hike, while Part III detailed how these tax increases will affect middle-class families.Dollar amounts are based on JCT estimates reflecting expected inflation adjustments for 2013.
This document explores how these looming tax increases will directly affect seniors. Without Democrat action, in 2013, seniors will experience significant tax increases when:
10 Percent Bracket Eliminated
Currently, the lowest tax bracket is 10 percent, and that bracket applies, in 2012, to the first $8,700 of taxable income for single filers (including seniors) and to the first $17,400 of taxable income for married couples filing jointly (including married seniors). In 2013, however, the 10 percent rate will disappear, meaning that the very first dollar of taxable income earned by all Americans, including seniors, will be taxed at a higher 15 percent rate. In fact, that higher 15 percent rate will apply to the first $8,900 of taxable income earned by single seniors and to the first $17,800 of taxable income earned by married seniors. JCT estimates that the elimination of the 10 percent bracket will cost 88 million taxpayers – including every senior who pays income taxes – an average of $502 in higher taxes next year.
Higher Taxes on Seniors’ Retirement Savings PortfoliosImpending tax increases on capital gains and dividends – detailed in the table below – will hit seniors particularly hard. Seniors will feel the impact not just in terms of the higher taxes paid on realized capital gains and dividends, but also in terms of depressed values of stocks – whether held directly, held through taxable mutual funds, or held through tax-advantaged IRAs and 401(k)s – upon which seniors rely to supplement their Social Security benefits. These higher taxes – and evaporated wealth1 – will cost many seniors the income they depend upon to pay for housing, food, medical care, and other monthly bills.
According to two 2010 Tax Foundation studies of IRS data taken from 2008 tax returns (which can be found here and here), Americans over the age of 65 earn the bulk of all dividend and capital gains income, considerably more than any other age group. Specifically, the Tax Foundation found that, in 2008, seniors:
Significant Increase in the Death Tax
For 2011 and 2012, the estate tax has featured an exemption amount of $5 million and $5.12 million, respectively (the exemption is indexed for inflation), with the assets of taxable estates subject to a top rate of 35 percent. Unless the Democrats who control Washington act, however, the reach of the estate tax will be dramatically expanded next year, with an exemption amount of only $1 million (not indexed for inflation) and a top rate of 55 percent. In many cases, the estate tax represents double or even triple taxation: the taxpayer paid tax when the income was earned, paid tax again on dividends or interest when that after-tax income was later invested, and then the estate must pay tax on the assets purchased with that previously-taxed income before those assets can be passed on to the taxpayer’s heirs.
Many seniors have spent their entire lives working, saving, and investing their assets to be able to pass along the fruits of their labor to their children and grandchildren. But if the Democrats’ 2013 tax hike is allowed to take effect, seniors who have accumulated assets of only a dollar more than $1 million – including seniors whose primary asset is a home that happens to have appreciated significantly in value over time – will once again find their estates subject to the death tax.
While the effect of the Democrats’ tax increases on any particular senior will depend on that taxpayer’s specific circumstances, it is clear that this is a massive tax hike that America’s seniors simply cannot afford. For more detail about the effect of the Democrats’ ticking tax bomb on other specific kinds of taxpayers – e.g., small businesses and investors – stay tuned for further documents in this series, coming soon.
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1Dr. Allen Sinai and Dr. Margo Thorning, for instance, have estimated that, absent enactment of changes to current tax law scheduled to take effect in 2013, “the stock market very likely would sell off sharply, estimated at nearly 18% per year over 2013 to 2017,” meaning that even seniors whose investments are limited to tax-preferred accounts would feel the effects (see: http://www.forbes.com/sites/realspin/2012/06/28/the-horrific-accident-awaiting-us-over-the-fiscal-cliff/).
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