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ObamaCare's Worst Tax Hike.
Old 03-18-2010, 09:56 PM   #1
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ObamaCare's Worst Tax Hike.

What do you think?

ObamaCare's Worst Tax Hike - WSJ.com

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Old 03-18-2010, 10:29 PM   #2
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The linked article is for subscribers only. What did it say?
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Old 03-18-2010, 11:47 PM   #3
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You can Google "ObamaCare's Worst Tax Hike" and read the article for free.

Here is the the proposal:

Quote:
For the first time, the combined employer-worker 2.9% Medicare rate would be extended beyond wages to interest, dividends, capital gains, annuities, royalties and rents for individuals with adjusted gross income above $200,000 and joint filers over $250,000.
That would lift the top capital-gains rate to 22.9% as the regular rate bounces back to 20% from 15% when the Bush tax cuts expire at the end of this year. The top rate for dividends would rise to 42.5% when the Bush income-tax rates expire. The White House plan also raises the ordinary Medicare payroll tax by 0.9 percentage points for the same filers, bringing it to 3.8%.
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Old 03-19-2010, 12:11 AM   #4
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This is unlikely to affect my personal situation as I have mostly tax-exempt income and a good supply of tax-losses to soak up any capital gains.

On the other hand, US personal income tax rates are quite low by historical standards (and global standards) so I'm not particularly alarmed (from an economic policy standpoint) if they begin to creep up.
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Old 03-19-2010, 12:33 AM   #5
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At this point, it is still unclear whether tax exempt income would be affected or not by this proposal. Because this is a Medicare tax and not a Federal income tax, they might have found a nice loophole allowing them to start taxing "tax-exempt" income. Also, while annuity income would be taxed, there is no word about pension income.

For high income folks, this new tax comes on top of higher federal income tax rates (and perhaps even higher state income tax rates), higher long term capital gains tax rates, higher Medicare tax rates on earned income, higher tax rates on ordinary and qualified dividends, and capped deductions. This could result in a fairly large tax increase which is going to hit all at once, like a ton of bricks, on January 01, 2011. Also, interestingly, this new tax will create a situation where interests and dividends could be taxed at a higher rate than earned income. All this could very well have an effect on the stock market and the economy at large. After all the top 20% of income earners is responsible for 50% of consumer spending in this country and consumer spending itself accounts for 70% of GDP. So if you hose the rich, you better hope that the government and private corporations pick up the slack or it's gonna get ugly. I can't see the government spend much more that what it is spending now, soooo...
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Old 03-19-2010, 01:10 AM   #6
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Can't say I'm surprised at tax increases of any kind and for any reason. Guess we all knew it was coming sooner rather than later. Still, I hope no one uses the word "free" on this forum when describing health care in the future. (I saw it once a few days ago - I let it pass. I won't in the future. You have been warned.).
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Old 03-19-2010, 01:22 AM   #7
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From the article:

Earning even a single dollar more than $200,000 in adjusted gross income will slap the 2.9 percent tax on every dollar of a taxpayer's investment income, creating a huge marginal rate spike that will most hurt middle-class earners, as opposed to the super rich, says the Journal.

Looks like the sale of a home in a high-priced area could trigger this tax.
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Old 03-19-2010, 03:03 AM   #8
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This sort of "trigger" - like the AMT "trigger" - is what seems the most unfair when it comes to taxes. Most of us accept (maybe more or less reluctantly) the progressive nature of our taxation. But, punitive taxation based on a dollar difference will be a boon to tax planners and bane to the moderately well to do (I don't say rich, 'cause I don't think even 200K/yr is rich - not to say I've ever come close, but I'd like to!)

This kind of stuff could get someone "un-elected" real quick! I'm sure Congress is counting on some slight-of-hand and also class-envy to sell this to the public. Funny thing about the rich. Everyone hates them but wants to become them. If Congress ever "forgets" to temporarily "fix" the limits on AMT, for instance, there are going to be a lot of folks who suddenly find out that they ARE the rich folks everyone wants to tax. Wouldn't want to be a Congressman up for election if/when that happens. Same for the 200K level. That will be "common" in the not too distant future. Rich - baloney! How about just not spending so much of our money in the first place? When we get tired of it, WE will do something about it. Maybe this will be the catalyst.
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Old 03-19-2010, 07:43 AM   #9
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Ironic. I was outraged at the Bush tax cuts that benefited me greatly. I thought I should be taxed higher than I was so we could manage the deficit and stop "starving the beast" like the GOP advocates. Now that we may finally be forced to raise the rates, I am retired and get a pass but can still feel self righteous in supporting the increase.
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Old 03-19-2010, 09:26 AM   #10
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Any idea when this new tax will go into effect? I notice a most of the coverage from the new bill doesn't go into effect until 2014, and the "cadillac plans" tax is delayed until 2018.

Not clear whether the new tax would start in 2011 or later.

Audrey

P.S. In principle I have no problem paying a Medicare tax as an early retiree since I do expect to take advantage of the coverage once I reach 65. Even though I have already earned enough credits to qualify - this is one area I think early retirees are getting a bit of a free ride. SS is based on your actual lifetime earnings so that's different. Not true with Medicare once you qualify. Although I would rather pay Medicare taxes on "income" - (i.e. interest and dividends) and not on cap gains - that seems bizarre.

Also, 2011 on, I think it's going to be easy for us to manage our annual income to keep it below $250K. I have already realized some large cap gains this year in anticipation of the expiring Bush Tax Cuts.
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Old 03-19-2010, 09:32 AM   #11
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Quote:
Originally Posted by audreyh1 View Post
Also, 2011 on, I think it's going to be easy for us to manage our annual income to keep it below $250K. I have already realized some large cap gains this year in anticipation of the expiring Bush Tax Cuts.
Audrey, I suspect keeping annual income below $250K ($200 for singles) won't be a big problem for most folks reading the form. I know it won't for me...
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Old 03-19-2010, 09:56 AM   #12
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We had a thread on this already.

Investment income is already massively tax advantaged, even after the coming proposed changes. This increase won't have all of the dire consequences forecast.

Meanwhile deficit scolds should be happy that for the first time in at least a decade the government is proposing to actually pay for its policies (including the tax cuts that lowered rates to their current level).
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Old 03-19-2010, 09:59 AM   #13
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Originally Posted by audreyh1 View Post
Not clear whether the new tax would start in 2011 or later.

Audrey
According to business week it starts in 2013 . . . so hurry up and harvest those gains!
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Old 03-19-2010, 10:04 AM   #14
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Originally Posted by FIREdreamer View Post
Also, interestingly, this new tax will create a situation where interests and dividends could be taxed at a higher rate than earned income.
You'll have to show me the math on this. The new top rate on capital gains and dividends will be 23.8% . . . nearly half of what the top rate for earned income is expected to be.

Interest income, which is taxed at the normal rate, could be taxed slightly higher, in theory. But in practice, anyone in the top brackets is going to be putting most of their money in tax exempt bonds.
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Old 03-19-2010, 10:39 AM   #15
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Quote:
Originally Posted by FIRE'd@51 View Post
From the article:

Earning even a single dollar more than $200,000 in adjusted gross income will slap the 2.9 percent tax on every dollar of a taxpayer's investment income, creating a huge marginal rate spike that will most hurt middle-class earners, as opposed to the super rich, says the Journal.

Looks like the sale of a home in a high-priced area could trigger this tax.
Or a home that has many years of appreciation in it, like mine. I'm single and have been planning to sell my house and retain part of the proceeds to fund retirement. Looks like this could put a big crimp in that plan. I may have to knuckle under and consult a tax person about this instead of doing them myself.

AND the pension system will be switching to a new actuarial table later this year which probably will reduce my pension benefit for same earnings + years of service, unless I retire in the grace period before the new tables go into effect...and I almost certainly can't afford to.

Does unclemick give "how to be a cheapskate" classes?
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Old 03-19-2010, 10:59 AM   #16
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Originally Posted by kyounge1956 View Post
Or a home that has many years of appreciation in it, like mine. I'm single and have been planning to sell my house and retain part of the proceeds to fund retirement. Looks like this could put a big crimp in that plan.
Remember that the first $500K gain on a primary residence is excluded from taxes for married couples. Then the gain wouldn't be hit with this medicare tax until of another $250K . . .so unless you're getting more than $750K gain on your place, it's pretty much tax free. And even if you realized a $1MM gain, the tax on that would be about $9,500 . . . not enough to put a "big crimp" in anyone's plan, I'm guessing.
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Old 03-19-2010, 11:05 AM   #17
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Remember that the first $500K gain on a primary residence is excluded from taxes for married couples. Then the gain wouldn't be hit with this medicare tax until of another $250K . . .so unless you're getting more than $750K gain on your place, it's pretty much tax free. And even if you realized a $1MM gain, the tax on that would be about $9,500 . . . not enough to put a "big crimp" in anyone's plan, I'm guessing.
I haven't had time to read the article yet so I didn't understand that. It has been a long time since I had to do a tax return with capital gains on it so I didn't remember whether the gain is included in your total income. Even if I retired right at the beginning of a year, the gains plus a full year of pension might possibly put me over $250K. I'm single so that was worrying me a bit.
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Old 03-19-2010, 11:48 AM   #18
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Remember that the first $500K gain on a primary residence is excluded from taxes for married couples. Then the gain wouldn't be hit with this medicare tax until of another $250K . . .
If this $250K isn't indexed for inflation, in a couple of decades it's going to be the AMT debacle all over again.
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Old 03-19-2010, 11:52 AM   #19
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You'll have to show me the math on this. The new top rate on capital gains and dividends will be 23.8% . . . nearly half of what the top rate for earned income is expected to be.

Interest income, which is taxed at the normal rate, could be taxed slightly higher, in theory. But in practice, anyone in the top brackets is going to be putting most of their money in tax exempt bonds.
Ordinary dividends are already taxed at the normal rate, only qualified dividends are taxed at a lower rate (And I didn't say anything about capital gains being taxed at a higher rate than earned income). But, it is my understanding that qualified dividends will be taxed at normal rates too starting in 2011, when the Bush tax cuts expire for high earners. So all dividends (except tax-exempt dividends) should be taxed as ordinary income starting next year (again for high earners only). So someone in the top tax bracket who currently pays 15% in taxes on qualified dividends will pay at least 39.6% in taxes on those same dividends starting in 2011 and 42.5% in taxes (39.6% federal income tax + 2.9% Medicare tax) on those dividends whenever the proposed Medicare tax goes into effect. That would be one hell of a tax increase.
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Old 03-19-2010, 11:52 AM   #20
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And even if you realized a $1MM gain, the tax on that would be about $9,500 . . .
For a single person after the 250K exclusion, my math says the additional tax would be 21.75K ( 2.9% of 750K), and that's on top of 150K from the 20% capital gains tax, and this is assuming you had no other unearned income that would be subject to this tax. For marrieds it would be 14.5K due to the bigger exclusion. As I'm sure you know (I believe you have told us you live in northern NJ), a fairly modest home in the NYC suburbs (e.g. Westchester County) could easily have this kind of gain if the home had been purchased 20-30 years ago.

Not challenging your politics here - just trying to get the math straight .
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