Discussion:New 114% Tax Rate

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Discussion Forum Index --> Basic Tax Questions --> New 114% Tax Rate


Discussion Forum Index --> Tax Questions --> New 114% Tax Rate

Wiles (talk|edits) said:

15 April 2014
One of my high income taxpayers, had their taxable income increase by $56K over 2012. Their Federal income taxes increased $64K.

Now that I am seeing year-over-year comparisons, I have to admit that I am quite shocked by the effect that the NII tax and the 39.6% rate is having on some taxpayers.

Ckenefick (talk|edits) said:

15 April 2014
Don't forget about the phase-outs of itemized deductions and exemptions.

Ckenefick (talk|edits) said:

15 April 2014
And don't forget about the 20% tax on LTCG's.

Ckenefick (talk|edits) said:

15 April 2014
And I hope you factored in the 0.09% add'l "Medicare" tax...

Death&Taxes (talk|edits) said:

15 April 2014
The Pease is killing people whose income is low seven figures. But at least they are not hit with AMT!!!!!!!

EADave (talk|edits) said:

16 April 2014
I have a client, whom I warned last year, that had no real increase in income this year but due to their high level of income, their taxes increased $30,000 due to the PEP and Sch A phaseouts, NII, yada, yada.

I think Congress' goal was to fund Obamacare within the first 3 years, then continue to siphon funds from hard working folks, hire more Govt. monkeys and run it into oblivion like most Govt. programs. Success.

By the way, I am truly bummed about this board coming to a close. I have gleaned many a good idea/thought from this board. I'll have to spend the next few months printing/saving posts from the legends on this board. What a shame.

I hope everyone survived today, I just filed my last return 9:30pm CST; ridiculous.

Ckenefick (talk|edits) said:

16 April 2014
More importantly, have you heard back from the Control Tower employee?

P.S. I'd like to raise my rates 114%.

P.S.S. Some people refer to those phase-outs as a backdoor tax increase. You know, even if the rates don't change, you might pay more.

P.S.S.S. This is not a lot different than what Clinton did.

CathysTaxes (talk|edits) said:

16 April 2014
My clients that received a taxable $275,000 distribution from a deceased relative were going to get hit with AMT, NITT, Sch A phaseouts, etc, until two of the legends on this forum suggested putting the decedent's trust on a fiscal year.

Neill (talk|edits) said:

16 April 2014
I am seeing more usage of deferred compensation plans. If high earners with access haven't done so already they see their deductions and exemptions phase out along with NIIT this year and they vow to use it next year. One large CA tech company that was a big supporter of Obama allowed all high tech employees to use DCP shortly before it was clear taxes were going up. They were also very quick to implement after tax 401k to Roth 401k in plan conversions. Clearly taxes are for everybody else.

DCP still gets hit by the 0.9% of course but it can stop a lot of stuff like NIIT and the 20% dividend tax rates. With lower incomes though you get more AMT showing up for people who normally earned too much to see it.

EADave (talk|edits) said:

16 April 2014
Haven't heard from the ATC client yet, gone with the wind. Ah well, I am sure I will run into an unruly train dispatcher soon....I can feel it.

Back door tax increase indeed. Just like Obamacare if you think about it.

A guy earning $40,000 with 2 kids and a wife, can't afford health insurance because he..........MAKES $40,000 A YEAR!

So, he gets on Obamacare and is "glad" his $800 quoted premium is only $300 per month after the gubmint subsidy. It's not affordable because prior to not having any HI, he couldn't afford it then either. The Govt. just found another way to "tax" this man that wouldn't normally pay much tax. It's a genius plan really, find a way for "everyone" to pay their "fair share". AND, this man won't use this newfangled HI because guess what, it's cheaper to tell the ER and the Doc that you don't have any HI (cash payer).

Alright, back to my cave.......

Death&Taxes (talk|edits) said:

16 April 2014
Talking to a stockbroker who owed 67K on 1.4M of earnings, and who is topped out on mortgage interest at 1.1/2.3M and Deferred Comp came up. I noted that nothing is vested, and while Morgan Stanley is unlikely to go the way of Lehmann Bros, it is something to think about before jumping into the pool.

ISOs were all the rage before TRA86, and I expect them to return and be banked.....at 1.4M there is room to exercise and not be clobbered by AMT.

BoulderDoug (talk|edits) said:

16 April 2014
"P.S.S.S. This is not a lot different than what Clinton did. "

Actually, it was Bush 41.

Ckenefick (talk|edits) said:

17 April 2014
Actually, it was Clinton that signed OBRA '93 (a/k/a Deficit Reduction of Act of 1993 a/k/a Revenue Reconciliation Act of 1993)...in August of 1993, 6 or 7 months after he took office.

Anyone ever heard of the Laffer Curve?

Makbo (talk|edits) said:

17 April 2014
114% tax rate? I'd expect a tax professional to be able to do basic math better than that. I'm also surprised that a tax professional would just now be "shocked" by tax rates that were known years ago... don't you do any tax planning for your clients?

Ckenefick (talk|edits) said:

17 April 2014
I'd expect a tax professional to be able to do basic math better than that.

Isn't 64 divided by 56...114%?

Makbo (talk|edits) said:

17 April 2014
I thought the OP said a "high income taxpayer", I wouldn't consider someone with $56K income to be a "high income taxpayer".

Ckenefick (talk|edits) said:

17 April 2014
Either would I. OP said the $56k was the increase:

One of my high income taxpayers, had their taxable income increase by $56K

EADave (talk|edits) said:

17 April 2014
That is why I continue to contribute money to my 2 favorite causes:
1. Center for kids that can't read good.
2. Center for tax professionals that didn't read the original post and can't do basic math.

I make it a part of my life's work, it just makes me whole.

BoulderDoug (talk|edits) said:

17 April 2014
Origins of the Phaseout of Itemized Deductions

"The phaseout of itemized deductions for high-income taxpayers under IRC Section 68 - also known as the "Pease Limitation" after Congressman Donald Pease who authored the original legislation - originated in 1991 as a phaseout of itemized deductions for 3% of every dollar of income above $100,000 (of AGI), up to a cap of 80% of itemized deductions."

Death&Taxes (talk|edits) said:

17 April 2014
And as I recall, Pease grafted his idea from California, where I believe the reduction began earlier.

Clinton did end up with a balanced budget his last two years.

Ckenefick (talk|edits) said:

17 April 2014
I'm not talking about the phase-out of deductions and exemptions. I'm talking about the 39.6% bracket...which was probably based on the Laffer Curve or some similar theory. The idea is to find the point at which people will still be willing to work and earn vs. throwing their arms up in the air and saying, "Why should I work and earn if the government takes everything?" In my experience, at 39.6%, all the high-earners will do is bitch, but they won't quit working.

Clinton did end up with a balanced budget his last two years.

This is for sure. I'm not making any political statements with any of my posts, by the way. And, it was Clinton's surpluses that led to those rebate checks cut by Bush.

I'm also pretty sure that Clinton was the mastermind behind "targeted" tax breaks, for the most part. You know, those breaks that either kick-in, or not, based on one's AGI, or MAGI or whatever...

Of course, what is interesting about all of this, or maybe not, is that every new politician, when campaigning, will harp on "change" and "new ideas"...and I myself haven't seen much change or any new ideas from either party, at least on the tax front. And if there is change, it's just changing from the "what's in place now" back to what it used to be, before the prior party in charge screwed everything up...and so on, and so forth.

Gazoo (talk|edits) said:

17 April 2014
I remember it like it was yesterday: Greenspan giving the "green light" to the Bush tax cuts for the wealthy. After all, Greenspan was blamed for the election loss of Bush I, so he owed the Bush family a favor, and he delivered in testimony before the Congress.

Well, as it turned out, we cut taxes twice, the second time, in 2003 in a war year...and wars cost money, and two of them cost even more money.

So, our balanced books were totally destroyed by Bush II, and the irony is that the integrity of Bush I and the good times under Clinton made possible our national balanced books. Bush I actually tried to do something to pay off the deficit which Reagan had quadrupled, and he got one term.

But, Obama irresponsibly hands out candy too...see the tax cut of 2010 given while our country was flat broke. Tell your wealthy clients to enjoy it while they can. We got a transportation system needs rebuilt, and an ocean to push back on both coasts, and the Colorado River petering out, and the Ogallala aquifer drained and dry. We got some concrete needs put down.

Ckenefick (talk|edits) said:

17 April 2014
So, our balanced books were totally destroyed by Bush II

I do believe lots and lots of Congress people voted on that Iraq Resolution. Of course, they all act surprised when it turned out to be a blank check. So let's start the blame game...and let's have some investigations and hearings.

Gazoo (talk|edits) said:

17 April 2014
I will admit it was unfair to blame it all on Bush II. I should have made clear that it was Bush II with the cooperation of Greenspan (specifically Greenspan's irresponsible testimony before the Congress that it was Ok to cut taxes).

But this is all water over the dam. We are on the verge of a new world, and by God even Hoover...even Hoover...built a dam. If I were to talk to a young graduate today I would say it's all about water. Not plastic or oil, which amounts to the same thing, but water. Where we have too much of it, and where we don't have enough of it. Money will be spent. Tax dollars. We know it will cuz even a man like Hoover built a dam.

I would tell the young graduate to look at how to make a buck off of water. Too much and too little.

Makbo (talk|edits) said:

17 April 2014
"Either would I. OP said the $56k was the increase: "

OK, since there is a fondness here for thought exercises, let's suppose in the OP that the taxable income had changed by zero, and the total tax liability had gone up $1. Same scenario, just different numbers. What then would be the rate? From your previous post, you indicated the formula was to divide the second number by the first, right?

Like I said, I would expect tax pros to know basic math better than that. Or maybe we're just playing a game, I can't tell.

Ckenefick (talk|edits) said:

17 April 2014
From your previous post, you indicated the formula was to divide the second number by the first, right?

In that case, based on the formula, you'd get an undefined tax rate, since that's what you get when you divide something ($1.00) by zero. The implication, of course, is that the $1.00 tax increase is not predicated on a taxable income increase (because there was none), but rather, is based on pre-existing taxable income.

Like I said, I would expect tax pros to know basic math better than that.

Still hard-pressed to see your point. There was no error in Wiles' math. Wiles laid out his formula and applied the numbers to it.

Now, is Wiles being shifty by assigning the entirety of the tax increase to the taxable income increase, when we all know that the new rates apply to ALL of one's taxable income and not just the taxable income increase?

Yes, of course he is. We all know you're going to pay more even if you make the same. I'm pretty sure most of us know that the rates don't work like this: (1) take last year's T.I. and multiply it by this year's tax rates (2) then, add to this figure, 114% of current year taxable income in excess of prior year taxable income. Wiles knows this too, he's not stupid. Like a News Reporter, he was attempting to report the news in a very alarming way. Most of us understood that and played along.

Ckenefick (talk|edits) said:

17 April 2014
...specifically Greenspan's irresponsible testimony before the Congress that it was Ok to cut taxes

Greenspan was old and looked like a deer in headlights in front of Congress when the meltdown happened. "No one saw it coming," or something like that, he said. Yet, I would bet most of us individual/small business accountants saw it coming...the irresponsible ways these banks were lending - negative amortizations, pick-a-pay mortgages, lending to everyone and anyone, lending to first-time spec home builders, etc., interest only loans, etc....and the way nearly every bank played follow the leader.

Makbo (talk|edits) said:

17 April 2014
"There was no error in Wiles' math. Wiles laid out his formula and applied the numbers to it. "

Using a formula correctly, and using the correct formula, are two very different things.

"Wiles knows this too, he's not stupid. Like a News Reporter, he was attempting to report the news in a very alarming way. Most of us understood that and played along. "

Well, I didn't think you were stupid either. OK, so we were playing a game. chacun à son goût

Ckenefick (talk|edits) said:

17 April 2014
Using a formula correctly, and using the correct formula, are two very different things.

Well, I didn't think you were stupid either.

Thank you. That makes one of us.

I don't think TaxAlmanac prohibits anyone from making up their own formulas. From what I can tell, 64 divided by 56 equals, and will always equal, 114%. This is Fuzzy Math at its finest! Perhaps Wiles worked in some political office for a while, probably for a Democrat or a Republican, but I can't say for sure. And I don't think Wiles was purporting that the new Obama rate was really 114%. If the new Obama rate really was 114%, then the title to Wiles' post would have been something like, "New 1,000% tax rate." Fuzzy fuzzy.

Spell Czech (talk|edits) said:

17 April 2014
The math isn't rigorous, and as such, it wasn't expected to withstand the scrutiny that it was bound to get. Not like the 0.09% additional Medicare tax.

Ckenefick (talk|edits) said:

17 April 2014
Did you like that one??? Maybe I should have said:

The "0.9%" Additional Medicare Tax That Does Not Go Into The Medicare Fund...

Makbo (talk|edits) said:

18 April 2014
"The "0.9%" Additional Medicare Tax That Does Not Go Into The Medicare Fund... "

We'll know when the individual SSA reports are available for 2013, whether the amount was used to calculate credits toward Medicare for individuals. Unlike the 3.9% "Medicare tax" on investment income, the 0.9% tax probably was a real payroll tax.

Ckenefick (talk|edits) said:

18 April 2014
http://www.taxalmanac.org/index.php/Discussion:4029_exemption_and_the_Net_Investment_Tax

I can't remember what we concluded, but here's the discussion.

Wiles (talk|edits) said:

18 April 2014
I was away, now I am back. Thank you for challenging my headline. I agree with all sides presented. Factual headlines are boring, indeed.

Is the fund balance in the Medicare Fund held as Temporarily Restricted?

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