Thoughts on the Expiration of the Bush-Era Tax Cuts
December 12, 2012
by Doug Short
We're now nearing the end of the second week of December. For my household, the potential expiration of the Bush-Era tax cuts impacts one major financial decision: My annual rollovers of a portion of a traditional IRA to a Roth IRA, which I started in 2010, when income limitations on eligibility for Roth IRA conversions were lifted indefinitely. Should I stick to my current strategy? Or should I make a jumbo rollover in anticipation of the expiration of the Bush-Era tax cuts?
Fortunately, the ability to recharacterize offers an "out" of sorts if I do the jumbo rollover and the cut for our bracket is extended.
Meanwhile, I spent some time this morning comparing some tax tables -- initially for my own tax planning, but ultimately out of fascination with the history of federal taxation. The first table shows the current 2012 tax rates for three categories: Single, Married Filing Jointly and Head of Household.
If the Bush-era tax cuts are extended, here's a look at the 2013 tax rates (my source was an excellent Forbes article).
If the Bush-era cuts are allowed to expire in toto, here's what to expect for 2013.
Of course there are many other unknowns, not least of which are the possible changes for tax deductions.
After pondering the tables above for several hours and doing some hypothetical scenarios on my Roth IRA conversion decision, I suddenly wanted to remind myself of the pre-Bush tax rates. Here is a table showing the nominal rates in 2000, the year before the first round of cuts.
But wait … that was twelve years ago, and we've experienced some substantial shrinkage of the dollar from inflation. Essentially the "real" tax brackets, chained in 2012 dollars, would be 33.3% higher. Here is the same 2000 table, but this time adjusted for inflation based on the CPI.
The federal tax implications of the Fiscal Cliff are extremely important, even though the Cliff talks, as I type this, are reported by CNBC to be "at a standstill."
In a follow-up article, I'll share some thoughts on the history of federal tax brackets. Meanwhile, here's the big picture on federal taxation, which started in 1913 and is approaching its 100th anniversary.
Note from dshort : I'm indebted to the Tax Foundation website, a fabulous source for data on taxation.