Chuck Schwab: Massive tax hits coming

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Politics,Paul Bedard,Washington Secrets

Charles Schwab, the stock broker to the masses, is out with a big warning to American investors who think Washington will do the right thing and agree to a tax and spending deal by year's end: Brace for the worst.

In a memo to investors, Michael Townsend, Schwab's vice president for legislative and regulatory affairs, made two dire predictions:

-- Taxes on all are going to surge.

-- The generous two-year "payroll holiday" is ending.

But the memo held out hope that Republicans and Democrats, still trying to judge the impact of Tuesday's pro-Democratic election, could come to a retroactive deal that tempers the shock of letting the Bush-era tax cuts and payroll holiday expire. Below is the memo's key points on those issues:

Tax increases are a real possibility

Given the stalemate between the two parties on the Bush tax cuts, odds are growing that all cuts will expire at year-end and taxes will increase for everyone on January 1, 2013. This would mean the following:

-- All income tax rates would increase.

-- Capital gains would be taxed at 20%.

-- Dividends would be taxed as ordinary income.

-- The estate tax would revert to a top rate of 55% in 2013.

Presumably, the two parties would then focus substantial energy in 2013 on a broader overhaul of taxes that is retroactive back to the beginning of the year. This would be complicated and confusing, but it is possible because most taxpayers would not feel the hit of the increased taxes until they file their returns in early 2014.

Possible revival of the payroll tax cut

The payroll tax cut, which lowered employees' shares of payroll taxes from 6.2% to 4.2%, has been in place for the past two years and is set to expire at the end of 2012. For much of this year, there appeared to be little interest in restoring the tax cut for 2013. However, Democrats in Washington recently began calling for an extension of the cut, expressing concern that the increase would hit lower- and middle-class workers hardest.

One idea currently floating around in Washington is to split the difference: Increase the share employees pay by one percentage point in 2013--to 5.2%--as a way to lessen the impact.