John Torinus adds up what is starting to be known as “Taxmageddon,” the upcoming end of the George W. Bush tax cuts after this year:
Without Congressional action and a presidential signature, many tax breaks for individuals and businesses expire at the end of 2012, and the combination of all those expirations could jack combined rates above the 50% mark.
Further, rates would rise for all taxpayers, not just the “one percenters.”
You’d think the negative effects on a struggling economy might scare the bejeesus out of congressmen seeking reelection this fall, but the level of dysfunction in our polarized capitol suggests the expirations could happen. It could be complete gridlock prior to the November elections and then paralysis in the lame duck session prior to new members taking office in January.
Here’s how a high earner could get to the magic 50% bracket:
• A married couple with income of $250,000 (they could own an LLC or an S Corp. where the business income flows through to them) would see their federal rate go from 33% or 35% to 39.6% on Jan. 1. For comparison, President Obama paid 20.5% to the IRS last year and Mitt Romney paid 14%. Some 40% of the population paid zip.
• Add on another 3.8% for a couple with mostly passive income (interest, dividends), a new tax come 2013 to pay for Obamacare.
• Add on the maximum 7.75% rate in state taxes in Wisconsin or 7.95% in Minnesota, meaning a net of about five add-on points after deduction from federal taxation.
• Add on 1.45% for the Medicare tax for each earner.
• Assuming the current two-point tax break goes away Jan. 1, add on 7.65% for the employee share of Social Security for income up to $110,000, or up to $220,000 if both spouses make more than that base amount or more. (You could argue that the employer share of 7.65% is also really a tax on the employee.)
Without the employer share of the Social Security tax, the stack-up in state and federal income-based taxes can accumulate to as much as 55%.
The same couple also pays a 5.6% sales tax in Southeastern Wisconsin. So if they spend half of their income on consumables, that adds another 2.8 points in state taxes.
And, at the local level, let’s assume they pay $5000 in property taxes, another two points before state and federal deductions, or at least one point on a net basis.
Add it all up, and our “rich” couple could be paying nearly 60% in taxes at all three levels. …
Suffice to say that the level of uncertainty about where the nation’s tax policies are going could be at an all-time high. That takes some of the perceived upside out of a lot of investments.
Every economist and business person would agree that such uncertainty curtails investment — just what we don’t need as a nation amidst a painfully slow recovery.
Every financial advisor is sending out red alerts to their clients, urging them to take defensive action on what could happen in 2013. Said one, “We’re all playing a wait and see game until the elections.”