Here's a quick guide to potential tax changes to look out for:
- Repeal of the Federal Estate Tax. The Republicans picked up a majority of seats in the House of Representatives but fell just short of a majority in the Senate. With only 47 seats, it's highly unlikely that the GOP can push a complete repeal through; they weren't able to do it in 2005 even with a majority vote. However, before the elections, it was all but settled that the federal estate tax would revert back to prior law with no action by Congress. I suspect that will change now. Look for a heightened interest in a complete repeal but plan on some sort of compromise bill that would increase the personal estate tax exemption and lower the estate tax rate. I also wouldn't rule out a short-term fix: With an additional 33 seats in the Senate up for grabs in 2012, Republicans may make repeal the center of their economic policy.
- Expiration of the Making Work Pay Credit. The Making Work Pay Credit of 2009 was President Obama's attempt at providing tax relief to middle class families. The controversial credit was only in place for two tax years (2009 and 2010) and is slated to expire in December unless it's extended. Barring an unexpected deal cut in the House, you can count on the credit quietly slipping away. The cost of extending the credit is estimated at $600 billion over 10 years, an expense that a Republican-controlled House isn't likely to approve.
- Capital Gains Rates Will Steady. For the past two years, the capital gains tax rates had been capped at 15% for long-term gains with a remarkable 0% available for some taxpayers. Those rates were the lowest rates seen for more than 20 years. If Congress doesn't do anything by the end of the year, those rates will revert to the 2001 levels, which means most taxpayers in the lowest tax bracket will pay 10% for long-term capital gains and most other taxpayers will pay 20%; that 20% rate is slated to bump up again in 2013. But don't count on Congress not doing anything. Promoting investment has long been a plank in the Republican economic platform; most conservative politicians feel that higher capital gains rates discourage those investments. I don't know that we'll continue to see historic lows in terms of capital gains rates, but I wouldn't be surprised to see a compromise bill that reduces the rates overall or, at the least, blocks the increases scheduled for 2013.
- Tax Cuts for Oil and Gas Companies. Earlier this year, Sen. Bernie Sanders (I-VT) introduced a bill that would limit tax breaks for oil and gas companies. He failed to get the votes he needed (60) to stave off those tax breaks, winning only 34. However, as Democrats look for ways to preserve funding for certain social programs, expect them to look to corporations, not individual taxpayers, to raise revenue. In June, Sanders noted that ExxonMobil, which reported significant profits, not only paid no U.S. taxes in 2009, but also received a $156 million tax refund. This year continues to be profitable for most oil companies; ExxonMobil reported a 55% increase in third quarter earnings just last week. As those profits rise and tax revenues do not, expect oil and gas companies to again become a target.
- Fluctuation in Individual Tax Rates. By now, you've seen the reports touting "tax increases" for next year. Technically speaking, it's not an increase but rather the elimination of a temporary tax break. No matter how you phrase it, here's what is true: Unless Congress makes a move, most Americans will pay tax at a higher individual tax rate in 2011 than they did in 2010. Who is slated to take the biggest hit? The top wage earners, who received the biggest cuts under the Bush tax plan -- they can expect to pay as much as $50,000 more beginning next year. President Obama and Democrats in the House had promised to preserve the cuts for the middle class but allow them to expire for the top earners. It's doubtful now that they have the political clout to do that (and they weren't gutsy enough to do it before the elections). However, it's also true that the Republicans don't have enough votes in the Senate to push through extended cuts for all taxpayers. I think this is another area where we'll see some sort of compromise bill. My guess would be that rates will stay flat but deductions will be limited at the top end. President Obama had suggested limiting a number of itemized deductions in 2009 in conjunction with allowing the tax cuts to expire but did not receive much support for the idea. However, limiting deductions while keeping the rates steady would be similar to the scheme under President Reagan's administration, which might make this combination palatable for those in both parties.