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Sunday, February 26, 2012


Most Americans are generally aware that the Bush tax cuts will expire in 2013, and that the new healthcare law will also impose some new taxes. As we get closer to 2013, the scope of the increases will come into clearer focus for taxpayers. For those taxpayers who will be subject to them (generally, married couples with income over $250,000 and singles over $200,000), the new amounts of their income that will be sucked into the abyss of what is the federal budget deficit is eye-popping:

Ordinary income, in general 35% 39.6% 13.14%
Earned income hospital insurance (HI) 1.45% 2.35% 62.06%
Capital gains 15% 23.8% 58.66%
Dividends 15% 43.4% 289.33%
Interest, rents, royalties 35% 43.4% 24%
Estate, Gift & Generation Skipping Transfers 35% 55% 57.14%
Estate, Gift & GST Exemptions $5.12 million exemption $1 million exemption 80.46% reduction in exemption

The income tax increases arise from two principal components. First, the maximum rates are being rolled back to the pre-Bush tax cut maximums (i.e., 39.6%). Second, investment income for those over the thresholds are subject to an additional 3.8% tax under Obamacare (e.g., on interest, dividends, capital gains, net rental income, and royalties – but excluding tax-exempt municipal bond interest and withdrawals from qualified plans and IRAs). Lastly, the HI tax on earned income is increased by 0.9% on persons over the thresholds.

Note that further increases in taxes will arise in 2013 that are not reflected in the above table. These relate to the return of limits on itemized deductions for higher income taxpayers.

Note that the threshold for the additional 3.8% investment tax and the new 39.6% maximum tax rate is extremely low for estates and noncharitable trusts that do not distribute their investment income (i.e., it is at the same income level that the highest income tax bracket begins to apply). Thus, many of such entities are in for some unpleasant increased check writing to the U.S. Treasury Department come 2013.

Of course, the Bush tax cuts rollback was deferred in 2010 for 2 years, so perhaps this could happen again. Obamacare is also up for review by the U.S. Supreme Court, and there may be a new President or party alignment in Congress after the 2012 elections. So, while all of the above changes will come into law if no new laws are passed, the uncertainty of what will happen in the law that has existed for the last few years will likely persist for the foreseeable future.

1 comment:

Anonymous said...

Don't forget two more from Obamacare:

Health expense deduction floor raising to 10% agi from 7.5%. Ex: For someone making $60k AGI that is a tax increase of $1500 if they would have made the 7.5% cap before.

FSA maximum lowering to $2500 from $7500. Ex: For someone w/ a ~24% agi tax rate, that amounts to a $1200 loss if they had a maxed FSA account, not even counting the potentials of raising AGI rates due to the lack of that $5k pre-tax deduction.