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We are now being treated to high theater in Washington with the two political parties trying to decide on how to
tweak the tax code to reduce the federal budget deficit.

The national sport of an election year is pandering to the voters. Earlier this year the Obama administration just
kicked off the election campaign with the release of their 2012 budget proposals. These included the following
tax increases:

  • Repeal of the Bush tax cuts, resetting tax rates back to 2001 levels. This will increase capital gains taxes
    to a maximum of 20%, and tax dividends as ordinary income. The maximum federal income tax rate will
    be 39.2%.
  • Limit the tax benefit of non-charitable itemized deductions to 28% for higher income taxpayers.
  • Limit the tax benefit on the following items to 28%:
    • Municipal bond income
    • Employee contributions to 401(k) plans
    • Health insurance premiums paid on your behalf

For example, if the tax on these excluded items would have been 38%, the excluded items would be
taxed at 10%.