Taxmageddon

 

Firm Partner, Tom Jones, suggests that high-income people should consider taking extra income in 2012 rather than possible higher tax rates in 2013.  Here’s a note that you can use as a base.

 

TAX INCREASES / TIMING DIFFERENCES FOR HIGH INCOME TAXPAYERS

I’m sure you’re following the “Taxmageddon” that they’re talking about toward year end.  My take on this is:

  • Our favorite politicians tell us they’re going to repeal Obamacare, but they definitely don’t have 60 votes in the Senate.  I think we’re stuck with the extra 3.8% Medicare tax on unearned income.  In some cases, it’s a .9% tax on earned income (you already pay 2.9% Medicare on company earnings).  If nothing else, the rate will be about 1% higher.
  • It is possible that they won’t act on keeping the rates at the current maximum 35% until AFTER JANUARY 1.  The regular rate could be 39.6% instead of 35%.  We’ll have a better guess after the election on what may happen…but it may be after year end still.
  • Tax rates definitely are not going lower!  Only if your 2013 income is below $400,000 is there a possibility that the bracket could be lower.

As such, I recommend that we consider NOT pushing income back into 2013.

 

EXAMPLE:  You have $500,000 of income.  Should we pay tax in 2012, 2013 with the extra .9%, or 2013 with the Clinton-era rates?

Pay in 2012

2013 with .9% extra

2013 at 39.6%

Tax at 35%

175,000

175,000

n/a

Tax at 39.6%

198,000

Medicare Tax 2.9%

14,500

14,500

14,500

Obamacare extra .9%

 

4,500

4,500

Subtotal

189,500

194,000

217,000

Tax paid in 2012

189,500

189,500

Extra tax

4,500

27,500

1% interest on 2012 tax

(1,895)

(1,895)

SAVED

 

2,605

25,605

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