Friedman predicts the following: Under the compromise late in 2010 that extended the tax cuts by President George W. Bush, employees in 2011 are paying Social Security at a reduced rate of 4.2 percent. President Obama would like to lower the 2012 Social Security tax rate for both employers and employees to 3.1 percent. But if Congress does not take action by year's end, the Social Security tax rate in 2012 reverts to the usual 6.2 percent for both employers and employees. Higher taxes could thwart any kind of economic recovery.
A number of other tax provisions also are set to expire at or near the end of 2011. Of interest to investors is the right to move as much as $100,000 from an IRA account to a charity to satisfy your minimum distribution requirement (also known as an RMD on your tax statement) without incurring tax.
Congress also must pass legislation known as the "doc fix" to avoid a scheduled 30 percent reduction in reimbursements received by doctors who see Medicare patients. If that is not extended it could hurt health-care and pharmaceutical companies.
Extending the lower tax rate and other tax breaks sounds in line with Republican promises to keep taxes low. But, it is not consistent with the Republican goal to reduce the budget deficit.
If Congress passes these measures, the lost revenue in 2012 will exceed the entire cost savings achieved from the debt-limit deal that inflamed Washington this summer.
In other words, our budget deficit actually would increase in 2012 and again in 2013, because some of these taxes are staggered.
Investors looking to sell businesses or to address concentrated stock positions need to prepare now, Friedman advises. He expects the current 15 percent long-term capital gains tax rate to be in the low 20 percent range by 2013.
