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What exactly could happen to taxes, federal spending

2:26 PM, Nov 7, 2012   |    comments
The action now moves from the campaign trail to negotiations at the U.S. Capitol in Washington, D.C. (Photo: Pablo Martinez Monsivais, AP)
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You'll see some changes in the U.S. Tax Code during the second Obama administration, and they may come quickly, if Congress allows the nation to fall off the so-called "fiscal cliff."

Changes in the tax code are never easy, and the fiscal cliff is especially onerous. Without action by Congress, the tax cuts enacted during the George W. Bush administration will end, sending the top marginal rate to 39.6%.

That shocker might be just the tip of the cliff:

• A rollback of the "income triggers" for alternative minimum tax (AMT) to their 2000 levels.

• An increase in maximum capital gains taxes to 20% from their current 15%. Dividends, now taxed at a maximum 15%, would be taxed at ordinary income rates.

• Cuts of $110 billion a year in federal spending, split between defense and discretionary spending, usually social welfare programs.

• Expiration of the 2 percentage point reduction in payroll taxes.

Aside from the economic shock of higher taxes and lower government spending, the IRS might have to delay tax refunds, says Eric Solomon, former assistant director of tax policy at the U.S. Treasury and current co-director of the national tax department at Ernst & Young. That's because a host of tax issues, largest of which is the AMT fix, affect the 2012 tax year.

The people who will resolve the fiscal cliff issues will be the same people who held office before Tuesday's elections -- in other words, President Obama and a lame-duck Congress. Obama wants the Bush tax cuts to expire for high-income taxpayers.

"The President could say, 'No deal," and let everything expire, or find a way to reach a compromise that allows an extension under certain conditions," Solomon says.

Should the President and Congress reach a deal for an extension, it may give both sides time to work together for an overhaul of the tax code -- something both sides say they are willing to consider. But revising the sprawling tax code is a vast undertaking. It hasn't been done since 1986.

Higher taxes on upper-income taxpayers may be the extent of Obama's ambitions for the tax code, and even that may be problematic. Republicans still control the House, which ultimately controls the nation's purse strings.

USA Today

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