This year's election chatter is already including a healthy dose of tax talk. To keep up, here are five terms you should know. The first two exist, while the last three are ideas for possible change.
The "Bush tax cuts" - A number of major tax changes were enacted in 2001 and 2003, including lower federal income tax rates, special maximum rates for long-term capital gains, qualifying dividends, and increased standard deduction amounts. Extended in 2010, these tax provisions are still commonly referred to as the "Bush tax cuts". With these provisions set to expire again at year-end, much of the tax debate will center around whether to extend the provisions again--particularly whether to extend the provisions for all taxpayers, or only to those who make less than a certain amount (e.g. incomes under $250,000).
Alternative minimum tax (AMT) - The AMT is essentially a separate federal income tax system with its own rates and rules. If you're subject to the AMT, you have to calculate your taxes twice--once under the regular tax system and again under the AMT system. Bush tax cuts expanding AMT exemption amounts were extended only through the end of 2011. This means more individuals will be subject to AMT taxes every year if nothing changes.
Flat tax—Simple in concept, a flat tax would apply a single tax rate to individual income, or individual wages only (i.e., excluding investment income). A separate single rate might apply to businesses. Depending on the specific proposal, a base exemption may be allowed to exclude low-income families from the tax, and certain deductions may be allowed in determining the amount subject to tax
Value added tax (VAT) - A value added tax (VAT) is a consumption tax, like a sales tax. What distinguishes the VAT from a straight national sales tax is the fact that the VAT is assessed and collected at every point in the chain of production, on the "value added" at that step in the chain. Although a VAT can be implemented in different ways, here's one general approach: With a 10% VAT in effect, a supplier who sells $100 of materials to a manufacturer would pay $10 in VAT; the manufacturer who, in turn, sells a finished product to a retailer for $150 pays $5 in VAT ($150 sale price - $100 cost of materials, multiplied by the VAT rate); the retailer sells the product for $200, and pays an additional $5 in VAT ($200 sale price - $150 cost, multiplied by the VAT rate). Total VAT paid on the product is $20, or 10% of the final sale price. Many European counties have this system in place, along with income taxes.
Fair tax | National Sales Tax—Like the value added tax (VAT), the Fair Tax is also a consumption tax, but unlike a VAT that collects at every point in the value added chain, the Fair Tax only collects once à the end user sale (consumer). While this may sound like all the burden is placed on the consumer, one must realize that businesses simply pass all of their costs (taxes too) on anyway. Thresholds could be implemented to protect households in lower incomes, while everyone is paying under the same system (rules). Hence the term "fair" tax. The real benefit is a single collection point (retailers - which already collect sales taxes) eliminates that majority of tax filers and costs in collecting (and filing).
Pete Thoresen | Financial Advisor | Focus Financial Network, Inc.
1000 Shelard Parkway, Suite 300 | Minneapolis, MN 55426 | 952-225-0344 direct | 952-591-9770 main
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