ELECTION YEAR TAX TALK – FIVE TERMS YOU SHOULD KNOW by Laticia Michelson

“BUSH TAX CUTS”Several “temporary” tax law changes occurred in 2001 and 2003, the majority of which were supposed to expire around 2010. Some of the changes included: lower federal income tax rates, lower maximum capital gain rates, lower tax rates for qualifying dividends, and increased standard deduction amounts. These are collectively referred to as “Bush tax cuts”. Many of these provisions were already extended at the end of 2010 and are now set to expire at the end of 2012. A significant amount of the election discussion will pertain to the extension of these provisions again for all taxpayers or only for taxpayers who earn less than a certain threshold.

ALTERNATIVE MINIMUM TAX (AMT)
The alternative minimum tax is calculated using a different set of tax rules than those used for regular tax. Under the AMT rules, some deductions taken for regular tax are not allowed or are limited. Also, certain income and expenses are recognized under different rules for AMT. If a taxpayer is subject to AMT, they are required to calculate their taxes twice (once under the regular way and once under the AMT rules) and pay the higher amount. Whether or not a taxpayer is subject to the AMT is directly related to the amount of the AMT exemption. The exemption amounts were increased via the Bush tax cuts and these increases were only extended through 2011. If the exemption increase provision expires, the exemption amounts will revert to significantly lower amounts and a large number of taxpayers will be subject to the AMT (and the resultant higher tax rates) in 2012.

THE “BUFFETT RULE”
During 2011, Warren Buffett, CEO of Berkshire Hathaway, wrote an editorial in the New York Times that essentially said he and his “mega-rich friends” were not paying their fair share of taxes. He noted that the tax he paid was a smaller percentage of his income than the percentage paid by many in his office. This is partly attributable to the lower capital gains rate and the fact that many “mega-rich” incur a significant amount of their income from the sale of capital assets, which is then taxed at a lower rate than ordinary income. President Obama has discussed what he considers a fairer tax treatment - the “Buffett rule”- that taxpayers making more than $1 million annually should not pay a smaller percentage of their income in taxes than middle-class families pay.

VALUE ADDED TAX (VAT)
A value added tax (VAT) is a consumption tax, similar to a sales tax. The difference between a VAT and a national sales tax is the assessment. A VAT is assessed and collected at every stage of production – raw materials, finished product, retailer, and consumer.

FLAT TAX
A flat tax applies a single tax rate to individual income and a separate rate to businesses.