On August 2, President Obama signed the Budget Control Act of 2011. The act plans to:
- Eliminate waste, fraud and abuse with health insurance and social security
- Provide an emergency spending reform
- Provide a balanced budget amendment for Congress to vote on
- Cut $1 trillion in spending in immediately and cap discretionary spending
- Select a “super committee” to work on deficit reduction
The “Super Committee” is to consist of twelve members selected by Congress. The committee is to draft legislation to reduce the federal deficit by at least another $1.5 trillion over the next ten years. A majority of seven or more members must approve the plan by late November, in order for Congress to vote on the plan by the end of the year. Some of this deficit reduction could include tax increases. If the committee cannot agree, or Congress fails to act, then automatic spending cuts will start without tax increases.
Earlier in the year, another bipartisan committee of Senators referred to as “The Gang of Six” began negotiations to reduce the deficit and produced an outline of spending cuts. It may be likely that this will be a starting point for the “Super Committee”. The “Gang of Six” plan would increase taxes by over a trillion dollars over the next 10 years relative to current policy. That’s roughly a 6.5 percent increase in total taxation.
The Gang of Six proposal reduces income tax from six brackets to three which are:
- Lowest two rates (10% and 15%) could fall to 8%
- Middle two rates (25% and 28%) could drop to 14%
- Top two rates (33% and 35%) could drop to 23%
Other proposed tax changes:
- Reduced deductions for mortgage interest, charitable deductions and medical expenses.
- Repeal deductions for state income taxes and all miscellaneous itemized deductions.
- Long-term capital gains and qualified dividends, which are currently taxed at a maximum 15%, would be taxed as ordinary income.
- Alternative minimum tax would be repealed.
It appears that there will be significant tax law changes in the near future. In addition, the Bush-era tax cuts are set to expire at the end of the 2012. These tax cuts could be changed before expiring. Please note that most of the above tax changes are only proposals, with the exception of the Bush-era tax cuts expiring. Kruger & Clary, CPAs will keep you updated on all of the changes as we learn more.