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Tax increases: Why you're poorer than you think

Changes in tax laws will hit Americans who make more than $200,000 a year.

By MSN Money producer Dec 19, 2013 5:07PM

By David Koeppel, The Fiscal TimesThe Fiscal Times


Recent tax law changes will hit the wealthiest Americans harder than others when they file their taxes in the next few months, thanks to new Obamacare taxes and increases in overall tax rates and capital gains taxes. 


Uncle Sam hiding banknotes under vest © Mike Kemp/Rubberball/Getty ImagesFor most income groups, the United States still has historically low tax rates and lower wage earners don't have as much sympathy for those at the other end of the income spectrum. That doesn't mean the top tier isn't feeling the pain. The tax rate increases begin to kick in for couples earning $250,000 or individuals making $200,000 per year. 


 "That is not rich," says Phoenix-based CPA Donna Esposito, a senior director of tax services for a large consulting firm, who says changes in regulations have upset both her relatively affluent and her extremely wealthy clients. "The regulations are so complex, it's overwhelming." 


Several factors are making this year particularly painful: there are four major tax increases that went into effect this year, plus the end of Bush-era tax cuts reinstated phase-outs for itemized deductions and personal exemptions. Here are some of the new or higher taxes high-income earners will see this year: 


  • Additional Medicare tax regulations authorize an increase in Medicare tax by 0.9 percent, for married couples earning $250,000 or individuals at$ 200,000.
  • The new Net Investment Income Tax (NIIT) imposes a 3.8 percent increase to investment income of "individuals, estates and trusts" and is triggered at the $250,000 or $200,000 threshold. Both of these taxes are being levied to help pay for the new health care law. The NIIT is not indexed for inflation. 
  • Tax on capital gains and dividends increased from 15 percent to 20 percent in 2013, for couples earning $450,000, or individuals earning $400,000 returning rates to Clinton-era levels. 
  • The top income tax bracket increased to 39.6 percent (From 35 percent in 2012) for married Americans making $450,000 or individuals making $400,000. Those taxpayers are also ineligible for the personal $3,900 exemption. 
  • A phase-out on personal exemptions caps how much high earners can deduct on their taxes. The phase-out limits exemptions for taxpayers who earn more than $300,000 (married filing jointly) or $250,000 (single) by 2 percent for each $2,500 earned above the threshold. 

Benjamin Harris, a policy adviser at the Brookings Institution says the new taxes present a "series of tradeoffs" for both high-end taxpayers and the American economy.  


"Deficits don't look as bad as they did in 2012 and there's more confidence that we can pay our bills," he says. "But one of the drawbacks could be that there is less incentive to undertake investment." 


The increased capital gains tax could hit taxpayers particularly hard, given the record year seen by the stock market. U.S. mutual funds are disclosing capital gains distributions greater than many investors have seen since before the financial crisis. 


A Morgan Stanley analysis of a hypothetical couple earning $500,000 per year, and $315,000 in investment income found that the couple's tax liability would increase from $183,000 in 2012 to $220,000 in 2013, a nearly 20 percent increase, some of which might be avoidable with additional tax planning. 


There are strategies high-earners can use to reduce tax exposure but there are also limitations, says Andrew Rotter, a partner at Citrin Cooperman, a tax and consulting firm in New York. "We tell people not to let taxes get in the way of their investment strategy," he says. "Don't let the tax tail wag the investment dog." 


One of Rotter's wealthy clients, a retiree, amassed $4 million in stocks and bonds and other investment income in 2013. He will owe an additional $400,000 in taxes this year because of the Net Investment Income Tax, and the increase in the capital gains tax, according to Rotter. 


Another of his clients strategically decided to minimize the effect of the NIIT by converting a proprietorship to an entity called an S corporation. The business income from an S Corporation isn't subject to the 3.8 percent surtax or self-employment tax. 


Still, his clients are resigned to forking over the extra cash. "No one's happy about all this, but no one's talking about expatriating," says Rotter. 


Since most of the new levies are straightforward taxes on income, there's little most high-income earners can do to avoid them, although some taxpayers may be able to structure their compensation to total less than $250,000. 


The easiest way to reduce income to take advantage of as many deductions as possible. The most valuable deductions are: charitable donations, which can be deducted up to 50 percent of gross income; mortgage interest, available on the first $1 million of mortgage debt; and state, local, and property taxes. 


The tax laws contain "a lot of moving parts" and high earning taxpayers should expect a "multiyear impact," says Greg Rosica, an Ernst & Young partner based in Tampa. He recommends that clients examine their investment portfolio and consider asset rebalancing and harvesting losses. This strategy means using taxable accounts to offset portfolio gains by taking capital losses in order to minimize capital gains taxes. This can be especially important in 2013 when long-term capital gains will be taxed at 23.8 percent and short-term gains taxed at a top rate of 43.4 percent. 


Another strategy is focusing on ways to delay income and accelerate deductions. This can work well if your income will be in a lower tax bracket this year, than it will be in 2014. A third strategy is using asset location as a financial planning tactic that involves dividing assets between taxable and tax deferred accounts such as 401k, and Roth IRAs. 


"Each person has a unique set of deduction and there obviously have been significant changes in the tax laws," says Rosica. "High earners especially need to look at planning opportunities now, because it will be too late in January." 


More from the Fiscal Times:


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295Comments
Dec 19, 2013 7:38PM
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Anyone making $200K or more is NOT poor. 

DC is, however, going to tax this country into poverty, for no other reason than greed. Notice how government programs are de-funded and cut, (eg: money for schools and teacher pay raises can never be found), yet, politicians never EVER seem to go without benefits (increases in benefits) and pay raises (substantial pay raises)...

Hmmm...

Dec 19, 2013 9:00PM
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And just where are all of these tax dollars going to go? To government waste, to incompetence committees, to corrupt politicians' pay/pension/ perks and to a 'healthcare program' that a majority of Americans don't want.


I don't have a problem with paying taxes, but the American people should have some sort of input on how the money is spent. A this point, it seems like it's becoming taxation without representation.

Dec 19, 2013 9:41PM
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The current scumbags in DC.....Vote to cut military veteran's benefits and continue welfare for illegal immigrants.


It's that simple. Democrats and Republicans alike voted to screw the military in favor of illegal immigrants who somehow have the right to vote. 

Dec 19, 2013 10:26PM
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OMG....Making 200K a year even paying 39% a year in taxes my wife and I could retire comfortably in 10 yrs tops. How you ask, living within our means. Making more than 200k a year is rich, just look at how the rest of the world lives in comparison to US (pun intended). Drive a car for longer than 3 yrs, realize you don't need a 25k kitchen remodel, or a 12k vacation. There are things in this life more fulfilling than the pursuit of material things and money. I may die on the brink of poverty, but I will go the same as the one who has 100 million dollars in the bank.......lol
Dec 19, 2013 7:48PM
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the wealthiest saw their personal tax rates cut in half from 1980  thru 2008-huge cuts in capital gains rates and their own incomes soar thru these years while everyone elses remained stagnant  at best ------------forgive me but the peons are not shedding a tear for you
Dec 19, 2013 9:23PM
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....they make good money - I'm not jealous of them.............................

 

It makes no sense that they should pay more taxes just because they worked hard to get a good paying job. Do they get more benefit than you or I from the government. They don't....so why should they pay more.

 

If you go to a restaurant - is your meal based on your ability to pay? RE: the high income person pays more for their meal? Get real - it's the same price for everyone - that's fair!!

 

obama's strategy is to tax the high wage earners, so that he can give FREE handouts to the social parasites - who in turn vote for him to get more FREE handouts. It's a vicious cycle that erodes the incentive to work for millions of deadbeat Americans.

Dec 19, 2013 7:45PM
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I could sit here and pretend to give a damn about the feelings of a rich person but I simply can't.
Dec 19, 2013 8:58PM
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That's rich.  I'm a retired federal Nuclear Engineer with a $30,000 pension for which I contributed 7% of my income.  Believe me, $200,000 a year is rich.  I'll gladly trade him my pension for his income.
Dec 19, 2013 8:11PM
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LOL...you're poorer than you think if you're on social security you know how broke you are.
Dec 19, 2013 11:36PM
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I don't need a article or the government  to tell me how poor I am and how much poorer I am going to get 

thank you

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Obama's goal of making the middle class poor is almost complete. Way to go sheep voters!
Dec 20, 2013 1:38AM
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I don't have a problem with the wealthy kicking in a bit more..., but giving it to our idiot Government means we'll be lucky to see 50 cents worth of value for every $1 they steal.  And I don't care how much money you make---the Governments (Federal, state, and local) don't deserve more than 40% of it! 
Dec 20, 2013 10:07AM
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I do not understand the mentality of this country, why do people think they are owed something that they have not worked for? Our government should be working on cutting its spending so people can keep what thy have earned. If my wife and want to purchase a tv, we have to budget and save for it, I dont get to run over to my boss and say "I need an incease in my salary, I just purchased a TV I didnt need."
Dec 19, 2013 8:29PM
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Cough it up.   With the vast amount of natural resources we have here in America, there should not be such a disparity between the haves and have nots.   For the wealthy, it may make the difference between not being able to buy their 5th vacation home.      For most who live paycheck to paycheck, it's about more macaroni and cheese, instead of chicken. 
Dec 20, 2013 1:58AM
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So based on most of the comments it would seem that a lot of people believe in the communist system. How hard do you think your rich neighbor is going to work if when he gets home he has to share it all with you. Remember he got up and worked hard all day. made some good decisions and possibly had some luck while you slept in, watched the news, had some coffee, scratched your balls and took an afternoon nap.


Now reverse that and tell me you are willing to give up more of your earnings  while your neighbor does nothing.


I agree in in helping all succeed but not in penalizing those who do. Facts are if taxes rates were flat 10% of 500k is still more than 10% of 30k and most of the wealthier people do not get earned income tax credits.


by the way I do not personally get close to 200 k a year

Dec 20, 2013 4:38AM
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So 200,000 turns into 100,000, maybe 120k while 47% pay zero?  Yet that 47% want those folks to pay more - Hmm who's being greedy here?  Now I see why the top 20% pay for 80% of the whole country. 
Dec 20, 2013 4:53AM
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At least 47% of the country doesn't have to pay for our stupid, corrupt government - if I was forced to give up half my paycheck but could give it to things I believe in I would be OK but giving it to a bunch of corrupt socialists is excruciatingly painful - this will lead to misery for all
Dec 19, 2013 11:10PM
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It is not rich but if they are hurting then how do you think the people making 50,000 per year or less feel. If I was making 200,000 per year I would gladly pay the extra tax. The problem isn't just with what people are making - the problem is why do some places like California have a crappy piece of **** home selling for a million dollars. You could make 500,000 there and still be poor. 
Dec 19, 2013 9:42PM
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There is a myth that if you tax the rich at an higher rate, they will not invest as much.  That is pure nonsense.  If I offer you a dollar, but say you must contribute 15 cents towards taxes, you will still take the remaining 85 cents.  If I now tell you that you must pay 20 cents toward taxes, do you seriously believe that someone would turn down the 80 cents.  The myth would be true if there were other options, but there aren't.  I find it very hard to believe that one would not continue to invest in something that they believe will make a profit simply because the amount of profit is lower.  The other choice is to put the money under your mattress and I don't see many serious investors doing that.  As far as I can tell, the myth is simply designed to scare people into believing that if the rich have to pay more, the economy will collapse and I see zero evidence for that.  I would also submit that taxing actual work at an higher rate than capital gains which are pretty much built on the work of others, is morally wrong. 
Dec 20, 2013 8:55AM
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Taxes on wages (in any form – flat or progressive) are the greatest evil of our American Republic. When government is free to steal from you, there are no limits to waste and abuse in government. If a person chooses to work extra hours or two jobs in order to better provide for themselves or their family, they should not be penalized, but that is what happens. The more you make by working harder and longer, the more money is stolen from you, and given to those who spend their lives living off the hard work of others.

The revenue the government needs to provide legitimate constitutional services should be obtained primarily from a national sales tax instead of a tax on wages. All would pay based on consumption, the more you spend the more you pay. The more luxury you surround yourself with, the more you pay. Your choice. A national sales tax system would capture money spent by criminals and by illegal aliens who currently pay near zero in taxes. There would of course need to be exemptions: Cars (already have a federal excise tax) Primary Residence/Rental Properties (vacation homes would be subject to tax/rental profit would be taxed) Fresh Food (Preprocessed foods and prepared meals would be taxed – only fresh/fresh frozen/canned goods would be exempt) Insurance Premiums, Health Care & Certified Education.

Adding another layer of tax to a business would not be fair. Businesses would need to be compensated by keeping a portion of the tax to cover the expense of collection and reporting. A percentage of .20 to .05 would be fair.

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