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Economix Blog: When $250,000 Isn’t Actually $250,000

December 9, 2012 by Leave a Comment

Binyamin Appelbaum and I have an article in Friday’s paper about President Obama’s proposal to raise marginal income tax rates for married couples earning “more than $250,000.”

As we note, there are lot of couples earning more than $250,000 whose tax liability would not be affected.

There are two main reasons: inflation, and the very narrow way income is defined in this proposal.

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

First, the thresholds that Mr. Obama originally staked out – $250,000 for married couples filing jointly and $200,000 for single taxpayers – referred to policies he wanted to take effect in 2009, and he has been indexing most of them to inflation so that they’re higher today. The adjusted thresholds for 2013 are $266,100 and $212,850, according to the independent Tax Policy Center. Mr. Obama uses $250,000 as shorthand for the higher-income taxpayers the increases are aimed at — perhaps for consistency’s sake, and perhaps because $250,000 is a nice round number. (The White House declined to comment on why the president still uses the $250,000 number.)

Second, the thresholds refer to a specific accounting term called adjusted gross income, or A.G.I., that excludes a lot of categories of income.

Now, if you ask people how much they make, they probably don’t respond with their exact A.G.I. Instead they probably think about their salary, wages, pension income, and maybe a bonus and investment income if those categories brought in substantial money.

That rough mental accounting for how much you make would include some money not counted in A.G.I. (and exclude some money that is part of A.G.I.). In other words, a lot of people might have more than $266,100 flowing into their bank accounts during the year but still have an A.G.I. below $266,100.

A.G.I. includes wages, salaries, investment income and bonuses – the categories mentioned earlier that might be part of a quick mental accounting of how much you make. But it can also be reduced by subtracting items like certain business expenses; health savings account deductions; some moving expenses; contributions to some retirement accounts like an I.R.A.; alimony paid; most Social Security benefits; some income earned overseas; tax-exempt interest on municipal bonds; and college tuition, fees and student loan interest, subject to limits.

On the other hand, there are some categories in your A.G.I. that you might not think to include if someone asks how much you make. These include rents; royalties; income from operating a business; alimony received; share of income from partnerships and S-corporations; income tax refunds; and the ever-popular gambling winnings.

For example, a married couple might make $300,000 annually in salaries and investment income, but after subtracting health savings account deductions, alimony paid and I.R.A. contributions, they might have an adjusted gross income of about $270,000. That means they would probably not be affected by the tax increases aimed at “high income” people even though they are indeed near the top of the income distribution.

To make things even more confusing, note that some of the tax increases intended for “high income” people (using Mr. Obama’s stated $250,000 and $200,000 thresholds from 2009) will actually apply to even fewer people than this analysis so far suggests.

Those whose income exceeds those thresholds would be affected by new taxes created by the Affordable Care Act, including additional taxes on both their earned income and their investment income. (And here the thresholds are actually $250,000 and $200,000, with no indexing. All the other taxes aimed at “high income” individuals are indexed; for some reason the Affordable Care Act taxes were not.)

But many at those income levels will not be affected by the expiration of the Bush marginal income tax cuts for upper-income people. That’s because the Bush tax cuts refer to an even narrower measure of income called taxable income, which is basically a subset of adjusted gross income that many high earners can reduce substantially with the help of a skillful accountant.

Taxable income is calculated by subtracting personal exemptions and deductions (either itemized or standard) from adjusted gross income. Itemized deductions include things like home-mortgage interest payments, health expenses, state and local taxes, and charitable contributions. While subject to limits, those deductions can bey large. Generally the reason to go through the hassle of itemizing deductions, after all, is to reduce your taxable income by much more than the standard deduction would.

Mr. Obama has defined all the thresholds for whose taxes he wants to raise in terms of A.G.I. But again, tax rates are based on taxable income. Mr. Obama’s method of translating his A.G.I. cutoffs into taxable income cutoffs is to take the A.G.I. threshold and subtract the minimum amount a family is entitled to exclude: one standard deduction and two personal exemptions for married couples, totalling about $20,000.

So when Mr. Obama promises he won’t raise tax rates for married couples with a 2013 A.G.I. of $266,100, the policy translates to taxable income thresholds of about $246,000.

Those are conservative calculations for how much taxable income people with these levels of A.G.I. will report. Usually people at those A.G.I. levels choose to itemize their deductions, which reduces their taxable income.

If you have a lot of deductions and personal exemptions, you might end up reducing your taxable income by so much that you no longer fall into a tax bracket whose marginal tax rate Mr. Obama proposes to raise. (You might still be subject to the alternative minimum tax – a parallel tax system that basically says you have to pay at least a given share of your income, regardless of how many deductions you take – but you will not be hit by the higher marginal tax rates on earned income that Mr. Obama is proposing.)

For example, a married couple earning $300,000 in A.G.I. might have itemized deductions of about $50,000 and a child, which means three personal exemptions. This comes to a total of more than $60,000 in deductions and exemptions, meaning this couple would have taxable income below the president’s threshold for higher tax rates. In fact, about 70 percent of all couples in the $250,000 to $300,000 A.G.I. range in 2013 would be unaffected by Mr. Obama’s proposal to raise taxes on those earning over $250,000, according to Citizens for Tax Justice, a liberal advocacy group.

Remember that all these higher tax rates refer to marginal rates – the escalating rates on each successive tier of income – not average rates.

That means that even if you do earn enough in taxable income to be affected by the higher tax rates, not all of your income would be taxed at higher rates. Only the income above the thresholds would be subject to a higher tax rate under Mr. Obama’s plan. The first couple of hundred thousand dollars would be taxed at the same rates that now apply.

Article source: http://economix.blogs.nytimes.com/2012/12/07/when-250000-isnt-actually-250000-2/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Oracle Paying Next Year’s Dividends Now, at Low Tax Rate

December 4, 2012 by Leave a Comment

Dividend payments are taxed at a preferential rate of 15 percent, but taxes could rise as high as 39.6 percent, depending on a taxpayer’s income bracket, if the Bush-era tax cuts expire as scheduled on Dec. 31. Higher income taxpayers will also be subject to a 3.8 percent surcharge on most investment income like dividends to help pay for President Obama’s health care law. That could bring the total possible tax rate on dividends to as much as 43.4 percent.

The Obama administration, which is pushing for higher dividend tax rates, is negotiating with Republicans in Congress over about $600 billion in automatic tax increases and government spending cuts that are scheduled to take effect in January, but no agreement is in sight.

Oracle accelerated second-, third- and fourth-quarter cash dividends totaling 18 cents a share of common stock, equivalent to $867 million, according to Thomson Reuters data.

In some cases, insiders are among the biggest beneficiaries of the special payouts, as well as shifts of regular dividends into 2012 from 2013. Oracle’s chief executive, Larry Ellison, the technology company’s largest shareholder, is entitled to dividends worth $198.9 million, according to Thomson Reuters data. Mr. Ellison did not participate in discussions or vote on the matter, Oracle said in a statement on Monday.

The accelerated dividend will be paid to stockholders of record as of the close of business on Dec. 14, with a payment date of Dec. 21, 2012.

Article source: http://www.nytimes.com/2012/12/04/business/oracle-paying-next-years-dividends-now-at-low-tax-rate.html?partner=rss&emc=rss

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Romney’s Tax Returns Show $21.6 Million Income in ’10

January 25, 2012 by Leave a Comment

Yet the hundreds of pages of tax documents released by Mr. Romney’s campaign on Tuesday morning did not readily reveal any elaborate financial legerdemain or exotic tax shelters. What Mr. Romney’s returns illustrated, instead, was the array of perfectly ordinary ways in which the United States tax code confers advantages on the rich, allowing Mr. Romney to amass wealth under rules very different from those faced by most Americans who take home a paycheck.

Those differences leapt to the front of the national debate on Tuesday when President Obama — whose family’s income was less than a tenth of Mr. Romney’s in 2010 but whose effective federal rate was double — called for higher taxes on the wealthy in his State of the Union speech.

Mr. Romney’s tax returns were posted on his campaign’s Web site on Tuesday morning after escalating pressure from the other Republican candidates, Democrats and even supporters, some of whom attributed his loss in South Carolina’s Republican primary last weekend to his shifting and tentative responses to questions about his wealth, tax burden and overseas investments.

The 547 pages of documents included 2010 federal income tax returns for the Romneys, the couple’s estimated 2011 return and returns for their charitable foundation and two blind trusts established in their names, as well as a trust established for their children.

The couple paid about $3 million in federal taxes on an adjusted gross income of $21.6 million, the vast majority of it flowing from a myriad of stock holdings, mutual funds and other investments, including profits and investment income from Bain Capital, the private equity firm Mr. Romney retired from in 1999.

The couple reported no wage earnings in 2010. But in a conference call with reporters on Tuesday, Mr. Romney’s campaign counsel, Benjamin L. Ginsberg, said that Mr. Romney and his wife collected more than $7 million worth of Bain profits in 2010.

That money — about a quarter of the couple’s income during the last two years — came in the form of so-called carried interest. It would be taxed not as deferred regular income, but at the lower 15 percent rate normally reserved for long-term capital gains, thanks to federal tax rules that have sparked intense debate in recent years.

Mr. Obama and others have argued that carried interest should be taxed at the rates which normally apply to income earned by people providing services, topping out at 35 percent. If Mr. Romney’s carried interest income in the last two years had been taxed at that higher rate, he would have owed about $4.8 million in federal taxes, roughly $2.6 million more than he would typically be assessed under current rules.

And like most of the wealthy, the Romneys paid only a tiny sliver of their income in payroll taxes, which cuts heavily into the weekly paychecks of wage earners but is barely a blip on the returns of the rich. While payroll taxes eat up 6 percent of the income of Americans earning the national median income of $50,221, Mr. Romney and his wife paid just one-tenth of 1 percent of their income in payroll taxes.

Mr. Romney’s 2010 returns also suggest he may have paid far less taxes the previous year. The 2010 return shows the family made estimated tax payments for 2009 of $1,369,095. To avoid penalties, estimated tax payments must be at least 110 percent of the taxes owed the prior year. Assuming that is what he paid, his federal tax bill for 2009 would have been $1,244,632, far less than in 2010.

Mr. Romney and other Republican candidates have not only opposed higher taxes on the wealthy, but also favor maintaining or expanding the relatively low rates for capital gains and interest income, breaks that Republicans and others favor as a way to spur investment and reward risk-taking but which critics say have fed the growing wealth gap.

Floyd Norris, Stephanie Strom and Kevin Roose contributed reporting.

This article has been revised to reflect the following correction:

Correction: January 24, 2012

A previous version of this article misstated the number of I.P.O. shares of Goldman Sachs that the Romneys bought in 1999; it was 7,000 shares, not 6,000. The article also misstated the share price and total when the shares were sold in 2010; the Romneys sold them for $161.45 apiece, or $1,130,123.87.

Article source: http://feeds.nytimes.com/click.phdo?i=5d302537c73ce0407901d1671899563e

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