The biggest tax and fiscal policy changes in a generation — or longer — will begin to arrive in the next year. They will have a major effect on tax planning. Here’s what you need to know about these simmering policy issues, and what you can do about them now…


While the politicians will talk about taxes at length, few major tax changes are likely to be enacted before the election or year-end. But two major tax problems will have to be addressed…

  • The alternative minimum tax (AMT) “patch.” The 2007 AMT patch has expired. Without another one, the number of people who pay AMT will expand from four million in 2007 to more than 26 million in 2008.
  • Expiring provisions. These “extenders” include the research and development tax credit, and about 60 other provisions mostly for business. These expire periodically and must be renewed in 2008 for firms to be able to continue to use them.
  • Problem: Last year, the Democratic Congress adopted “pay-go” (pay-as-you-go) rules that require the revenue cost of such items as the AMT patch and extenders to be offset by other tax increases or cuts in certain popular spending programs. But Congress doesn’t want to impose other tax increases or spending cuts.

    The result last year was delayed enactment of the AMT patch until the very end of the year, when Congress exempted it from the pay-go requirement. Some of the extenders were not extended at all, but are still pending.

    This year: The cost of an AMT patch rises to $62 billion (from $50 billion for 2007), and the cost of renewing the extenders will be more than $50 billion — so more than $112 billion in offsets will be needed to enact them under pay-go rules.

    The AMT patch and the extenders will likely be delayed until very late in the year once again. Though nobody can say for sure, an AMT patch like last year’s will probably be enacted. But only the most important extenders will be renewed before the election.

    For 2008, other major tax laws will probably remain the same. But some offsets (such as taxing hedge fund managers and closing other specific “loopholes”) may be enacted.


    The biggest tax and fiscal changes since the Tax Reform Act of 1986 will start to be considered in 2009. After lengthy debate and public hearings, 2010 should be a banner tax legislation year.

    Driving tax legislation will be a fiscal trifecta of major tax and budget challenges that start being felt next year. The three challenges…

  • Expiration of the Bush tax cuts. Under current law, the Bush tax cuts will expire on December 31, 2010 — so Congress may begin considering their fate during 2009. Scheduled to expire…
  • The top federal income tax rate of 35%. The new top rate under current law will be 39.6% in 2011.
  • The 15% top tax rate on qualified dividends. Dividends will become taxable as ordinary income at rates up to 39.6%.
  • The top 15% tax rate on capital gains. The rate will increase to 20%.
  • “Marriage penalty” relief, which increased the standard deduction and the amount of income subject to the low 15% tax bracket on joint returns.
  • The 10% income tax bracket. The lowest bracket will be 15%.
  • Estate tax whopper: The estate tax, after being fully repealed for one year in 2010, will return in 2011 under pre-2002 law, with the amount exempt from tax reduced from today’s $2 million ($3.5 million in 2009) to only $1 million, and the top tax rate increased from today’s 45% to 55%.

    If all of the above are allowed to take place on January 1, 2011, we will see an overall tax increase of approximately $2 trillion over 10 years.

  • Fixing the AMT. This becomes more expensive to fix every year. Without additional ever-more-costly patches, in 10 years the AMT will affect 39 million taxpayers, including 60% of those with income between $75,000 and $100,000. It then will be more costly to repeal the AMT than the regular income tax!
  • Republicans as well as Democrats say that they want to repeal the AMT, but the cost now would be $1 trillion over 10 years. So, don’t count on it being repealed. Under pay-go rules discussed earlier, to extend the expiring tax provisions and fix the AMT, Congress would need to raise taxes to the tune of $3 trillion over 10 years.

  • Soaring Medicare and Social Security costs. As the first baby boomers collect Social Security retirement benefits in 2008 and Medicare in 2010, and do so in fast-rising numbers every year after, the costs of these programs will skyrocket.
  • The result must be either tax increases to fund these programs or cuts in their benefits — both of which will be unpopular — or a combination of the two.

    Congress will be forced to deal with these issues by 2010. The combination of the expiring Bush tax cuts, the need to address the AMT, and the rising cost of Medicare and Social Security will appear in the five-year “budget window” that Congress uses to plan budget expenditures and tax revenue.


    Democrats, who seem likely to retain control of Congress, and the leading Democratic presidential candidates have proposed repealing those Bush tax cuts that most benefit high-income individuals (the 35% tax rate, 15% rate for dividends and capital gains, estate tax repeal, etc.).

    Some in Congress, including Charles Rangel (D-NY), head of the House Ways and Means Committee, have proposed reducing corporate tax rates.

    Why: Most other nations have cut corporate rates in recent years, leaving the US with among the highest corporate tax rates in the world — reducing competitiveness.

    But Democrats also want to increase spending for such items as universal health insurance while avoiding cuts to Social Security and Medicare benefits. To pay for repeal of the AMT, Rangel proposed increasing individual taxes to higher than pre-2001 levels — increasing the top personal tax rate to 44%. Such a rate hike would also hit owners of businesses organized as pass-through entities (such as S corporations and partnerships).

    Republican Senator and presidential candidate John McCain promises to keep the Bush tax cuts if elected — but faced with the same fiscal pressures and probably a Democratic Congress, it is hard to see how even a Republican president could avoid significant, if smaller, tax increases.


    Nobody knows the future, but consider the possibility that today tax rates are the lowest they will ever be, and that tax increases may come as soon as next year or 2010. Implications…

  • The standard strategy of deferring taxes may need to be reconsidered.
  • Example: The owner of a private corporation with large retained earnings may want to take profits out of it through large dividends now, while the 15% rate applies, rather than later.

  • Tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, become less attractive when taxes on their future distributions will be higher — while Roth IRAs and Roth 401(k)s become more attractive for making tax-free distributions in the future.
  • Plan for the estate tax to be renewed — and retain flexibility in your planning to deal with major changes in the estate tax in the next two years.
  • Review your financial planning generally to provide more funds to meet your needs in the future, because you may need more funds before tax to cover the expenses you expect after paying higher tax rates.

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