Brace Yourself for the Tax Hike You Didn’t See Coming
Well, everyone saw it coming didn’t they? With the last minute agreement over a Fiscal Cliff deal, the tax hike on the “rich”, also referred to as the 98%, has become law. The good news for some physicians is that the income threshold designated as “rich” was increased to $450,000 from $250,000. So, anyone whose income is below the threshold should breathe a sigh of relief, right? Wrong. You forget that in matters of the government and taxes things are never as they seem. In the hastily drawn backroom deal that even the members of Congress didn’t get to read, someone snuck in a couple of provisions that could actually hit those earning just above $250,000 the hardest. Brace yourself.
In the 1990 tax increase legislation, two provisions were added that limited deductions and exemptions for high earners. Those provisions, referred to as PEP and Pease, expired in 2010, so high earners, in effect, saw a big tax decrease at that time. With the new tax law, these stealth tax increases were given new life, with no one the wiser. Here’s how it happened.
In the back and forth negotiations, President Obama was able to finagle a concession from Speaker Boehner. In return for lifting the income threshold for the increasing the top tax rate to 39.5%, he received a phase-out for personal exemptions and limitations of deductions starting at $250,000 ($300,000 for joint filers).
What that means is a loss of nearly $4,000 in personal exemptions per family member resulting in a 4.4 point increase in the marginal tax rate for a family of four earning more than $250,000. A family of six would see a six point increase. When you add in the limitation on deductions, it could increase the tax rate by another point. The net effect is that families in the 33% bracket would actually end up paying taxes at a 38% rate or above.
For example, a physician married to a sales executive who together earn $350,000, could end up paying taxes at a rate that is higher than they would have paid under the Clinton tax rates which Obama wanted to emulate. And, those earning over $450,000 will more likely pay at a rate higher than the top Clinton tax rate of 39.5%.
But wait. There’s more. Add in the other stealth tax increases on investment income found in Obamacare, and the top tax rate approaches 45%.
The “big compromise” turned out to be a bait and switch – agreeing to a higher income threshold in return for caps on exemptions and deductions which is nothing more than a backdoor tax increase. In fact, more than $150 billion of the revenue generated from the new tax hike will come from this stealth tax.
That may not be the end of it. As Obama exclaimed when he flew out of sight (to his Hawaiian vacation), there will be more tax hikes to come. Brace yourself.