January 1, 2013 A Date Which Will Live In Tax Infamy

The Bush tax cuts expire and the Obamacare taxes kick in on this date. It will really hurt those Americans who pay taxes. Below is a list of some of the changes to our taxes which are already scheduled to happen on 1/1/2013.

1. The 10% tax bracket goes to 15%. The middle 3 brackets all go up 3% points. The highest bracket goes to 39.6% from 35%.
2. The estate tax rate goes from 35% to 55%. The estate tax exemption and the lifetime gift tax exemption drops to $1,000,000 from $5,120,000.
3. The long term capital gains rate increases to 20% from 15%.
4. Qualified dividends will be taxed at ordinary tax rates instead of capital gains rate.
5. Net investment income will be subject to a medicare surtax rate of 3.8% for higher income taxpayers.
6. Higher income taxpayers will also be subject to an additional medicare tax of .9% on wages and self employment income.
7. Families covered by very expensive health care plans will be subject to a 40% excise tax.
8. The threshold for deductible medical expenses increases to 10% from 7.5% making it more difficult for those with big medical or dental bills to get  tax benefits from the expenses.
9. The child credit drops to $500 from $1,000.
10. The student loan interest deduction goes away.
11. Exemptions and itemized deductions are limited for higher income taxpayers.
12. The higher alternative minimum tax thresholds are reduced back to a very low threshold. Millions of more taxpayers will be affected by this tax.
13. The child care deduction limit drops to $2,400 from $3,000.
14. The marriage tax penalty is back in play.
15. The American Opportunity college education credit expires.

The First Income Tax

The very first income tax imposed by the Federal government was in 1862 because President Lincoln needed money for the war effort to prevent the Southern States from becoming an independent country. The tax ended after the war and was later declared unconstitutional by the Supreme Court in 1894. Before 1862, the country was able to cover the cost of government and defense with import duties and excise taxes. A per capita property tax was imposed twice by the Federal government on the States to raise money when extra was deemed needed.

Working in a Foreign Country

I believe the US is the only country to tax its citizens on their worldwide income. Mitigating this harsh policy is the rule that allows those working in foreign countries to exclude $92,900 in foreign income from their taxable income. To qualify you have to be either a full time resident of a foreign country for a year or be present in a foreign country for all but 35 days in a 12 month period. Foreign taxes paid on the excluded income don't qualify for the foreign tax credit.

1913 Form 1040

Our current Federal tax system dates back to 1913. The highest rate on the tax return for that first year was only 6% on net income over $500,000 compared to 35% now. Form 1040 was only 4 pages long too. Those were the good old days.