You may question why I call the coming federal tax increases a Tax Bomb? The reason is that he tax increases that are coming are going to impact individual households and the economy as whole in the same manner that the atom bomb impacted Japan at the end of World War 2.

Most Americans are so caught up with the current problems that are hitting us they don’t have time to look ahead at what is coming.

The first tax bomb will impact us in 2009 when the reduction of capital gains taxes expires. Thousands of people that rely on stock dividends for their income will pay two to three times as much in taxes. Then in two years 2011 the tax bill will increase by half to double once again.

Why?

Currently dividends are taxed at a favorable capital gains rate but starting in 2009 dividends will be taxed as ordinary income.

If you have stock or real estate to sell the capital gains rate will double in 2009.

The reason for this is the economic stimulus package that was passed by congress to overcome the effects of the World Trade Center bombing of 2001 will start to expire at the end of 2008 and expire in 2010. In 2009 dividends will be taxed as ordinary income and capital gains and ordinary income rates will go back to 2000 level.

What does this mean to you as a taxpayer?

It means that unless you and I can convince congress to extend the favorable tax rates many of us are going to be paying a lot more tax than we ever imagined.

An example of the impact: say you are married two children 15 and 16 and you are making $50,000 at your job and have $5000 in dividends in 2008. Your federal tax bill in 2008 would be about $1,250 or less. In 2009 it will jump to $3,000 in 2011 the taxes will jump to about $6,000. Those that make more will see more dramatic tax increases.

Another example of the coming tax increases is a single person making minimum wage in 2008 will pay about $600 in federal tax. In 2011 his federal tax will increase to $1500.

A retired couple living on dividends of $50,000 will pay no federal tax in 2008 but in 2009 they will be taxed $4500 on the same dividends.

Are you ready for these tax increases?

There are a number of things that you can do to offset these taxes but you need to act pro actively now.

Things that you may want to ask your tax advisor about are:

A home based business such as an MLM.

A Self Directed Roth IRA.

Roth IRA’s.

The best thing we can do is write our congressmen and convince them to make the tax cuts permanent or better yet just replace the people in congress with people that will not hide tax bombs in the tax code.

Watch for coming articles on MLM’s and Self Directed IRA’s.

Marvin Crowther is the founder of MCCrowther Tax Services and he has written a series of articles to help the public, his clients and subscribers save money on their taxes. The web site for MCCrowther Tax Service is http://www.mccrowtherassoc.com you can email for further information or to subscribe to the newsletter at listings@mccrowtherassoc.com

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