What The Increase In Tax Rates Mean For The Economy

The Stock Market is threatened by Changes in the U.S. Tax Code

The stock market is expected to take a beating if tax rates on capital gains are increased by two thirds. There has been a lot of debate as to whether or not the economy will benefit or suffer because of these changes.

Apart from capital gains taxes, income taxes are also expected to increase. These changes will cause a lot of problems in the future unless the President and Congress agree on contentious issues. These two parties must agree before the year ends.

Investors in the stock market will have to protect their investments just in case taxes are increased. Many of them will have to sell before the new laws come into force. This is because an increase from 15 percent to 25 percent means that investors who will sell next year will lose 10 percent of their profits. For instance, those who plan to sell this year and get $100,000 in profits will pay $15,000 in 2012 taxes. If the same people liquidated their assets next year, they will have to pay $25,000 in 2013 taxes. The difference is quite significant, and many people will decide to liquidate their assets this year.

If a solution is not found before the election, the stock market might just experience the biggest sell-off in history as people rush to liquidate their paper assets before the next tax year.

People often consider many factors, including tax rates, when making investment decisions. This means that investors will consider what they will pay in 2012 taxes before they invest in anything.

What’s New For Taxes

We have made it to our next tax season!  While your taxes are not due for several weeks still, this is the month that you will be receiving the documents you need to turn in: all of your W-2s, any 1099s you may have received for investments, and so on.  If you do not have a system in place to take care of your 2011 tax filing, now is the time.

Thanks to April 15 being on a weekend this year, taxes are not due until April 17 this year.  If you cannot get your taxes filed by that point, you also have the option of filing for an extension until Oct 15.  This is for filing, and not paying your taxes.

The IRS has made some adjustments to the way it requires people to file their income, particularly for capital gains taxes.  They have developed a new form, Form 8949, that you will use for these gains or loses.  This will be especially useful if you are reporting sales of stocks.

There has been a payroll tax on the books for the past couple years, and Congress has extended it to February 29, meaning you will be paying 2% less on social security wages through February at the least.  If you make more than $110,000 per year, you will not need to pay social security.

Another major change is that a health insurance deduction for self-employed workers no longer offsets the self-employment tax.  If you pay these premiums you can still deduct them from your 1040 however.

Finally, the Making Work Pay tax credit is no longer offered.  For the past couple years many Americans got a $400 credit for working traditional daytime jobs.  This has expired and there are no plans to renew it in the future.  These changes have not drastically changed 2011 tax filing, but they are new for 2012 and are something to make note of.