This week, President Obama once again took aim at what he calls “tax preferences” for these high-income households, proposing two changes that would affect the low six-figure set starting in 2013.
First, he would let former President George W. Bush’s tax cuts expire for higher-income households. Second, he would limit the rate at which high-income taxpayers — married people with over $250,000 in household income filing a joint return and singles with more than $200,000 — can reduce their tax liability to a maximum of 28 percent. This limit would apply to all itemized deductions, among other things, if President Obama gets his way, which would have the effect of causing many people to pay more in taxes.
Forget for a moment that President Obama will almost certainly not get his way, given that even bills to help American victims of natural disasters don’t get a rubber stamp in Congress anymore. And let’s save for another day the debate over whether people with incomes like this deserve any sympathy.
What gets lost in all of the hand-wringing over the proposed tax increases is that many of the people this is aimed at wouldn’t pay a whole lot more. And families who work at it just a bit, using employer-sponsored flexible spending and other accounts to pay for things like day camp and the commuter train and visits to the therapist, could offset that 2013 tax increase and then some.
How could it be that this supposed tax increase won’t amount to much for many people? Thank the alternative minimum tax. Hey, at least it’s good for something.
Consider this hypothetical family and the numbers that would end up on their tax worksheets, as calculated by Joan Trimble, a tax partner at Berdon L.L.P., an accounting and advisory firm in New York City.
The family includes a married, heterosexual couple earning $350,000 combined annually that received no raises from 2011 to 2013, lives in the suburbs of New York City and has two children. They pay $20,000 in real estate taxes each year and $24,000 in annual interest toward their mortgage, make a total of $30,000 in 401(k) contributions and give away $9,000 in charitable contributions in all three years.
Let’s assume that the annual A.M.T. patch continues to occur each year — the patch adjusts the calculation that accounts for inflation to avoid ensnaring even larger numbers of taxpayers. (That assumption is a pretty safe one, though who would have predicted that you could elect to pay no estate taxes in 2010?) With the patch, this couple will pay tax at the A.M.T. rate in 2011 and 2012. Their total federal taxes in each of those years will be $65,604.
If the Bush tax cuts expire in 2013, they’ll no longer be paying the A.M.T. rate. But their income taxes will be only $66,981, just $1,377 more than 2012.
That number does not take into account the president’s proposed 28 percent deduction limit. Ms. Trimble said that there was a lot of debate in tax circles about precisely how it would work in practice.
But if the proposal simply means that you calculate taxable income for 2013 and then pay 28 percent of it, you get $69,633, or just $4,029 more than the family would have paid in 2011 and 2012. (Also, $900 of that increase in 2013 isn’t even attributable to the expiration of the Bush tax cuts or the 28 percent cap; it comes from the recent increase in taxes on higher-net-worth households to pay for Medicare, which goes into effect in 2013.)
So the hit isn’t all that bad. And you can make it go away entirely and then some by finally signing up for (and maxing out your set-asides in) those flexible spending and other accounts for health and dependent care plus public transportation or parking. With these accounts, your employer makes it possible to put aside money before it takes out income taxes (or to make a deposit in a way that qualifies you for a deduction).
Let’s say our hypothetical family was like, oh, a lot of you. This family couldn’t be bothered chasing what seemed like pocket change each month, filling out flexible spending account forms, carrying around debit cards, putting in for reimbursement or worrying about money in the health care account expiring at the end of each year.
In the world of health care flexible spending accounts, for instance, just 23 percent of people who have access to the accounts at employers with more than 500 workers actually sign up, according to Mercer’s 2010 national survey of employer-sponsored health plans.
But come 2013 and the tax increases, the family maximizes all available employee benefits. So they put a total of $5,000, the maximum, in a dependent care account to pay for day camp for the two children. They also set aside a total of $2,500 from their paychecks for the health care costs that insurance doesn’t cover. Since they both use public transportation to get to jobs in the city, they each ask their employers to remove $230 per month (which is the current monthly limit) and load it onto a debit card that they can use to pay for train tickets. Also, one of them has a health insurance plan at work with a high enough deductible that the family is eligible for a health savings account and the deduction that comes with it, so they put in the maximum household amount for 2011, $6,150.
The result of all this maneuvering would be $5,800 less in taxes owed for 2013 than what they would have otherwise paid. That more than makes up for what would have been a $4,029 increase from 2011 to 2013 had they never gotten around to signing up for all of these tax benefits.
There are a few caveats to keep in mind here. Your employer needs to offer the plans in the first place for you to take advantage of them. Big companies tend to offer most of them, but smaller ones may not offer any.
The Bureau of Labor Statistics reports that among individual civilian workers who took home more than $81,806 in 2010 (which would put them in the 90th percentile of earnings), 22 percent had access to a health savings account, 64 percent had access to a health care flexible spending account and 61 percent could participate in a dependent care account. If your employer doesn’t offer all of these benefits, get your fellow workers together and lobby hard for adding the plans.
Then there is the possibility that the rules for these tax deals might themselves change. The contribution limit for flexible spending accounts will be $2,500 in 2013, lower than it has been in the past. If you think more pain is coming in this area, then start maxing out these accounts in 2012 and not 2013.
Also retirees with high incomes who lack these employer accounts probably wouldn’t be able to offset the tax increase in 2013 and could be hurt further by the president’s proposed tax changes, depending on what sort of investment income they have and how it ends up being taxed.
In the meantime, try to look at the bright side. The president’s plan could still let you deduct the mortgage interest on your lakeside second home, within reason. Your contribution to Harvard’s $32 billion endowment will still be tax-deductible. Same thing for, say, a fancy church or synagogue in all of the bucolic suburban hamlets in the land. While you’re at it, don’t forget to thank the tax gods for 20 years of tax-free earnings in 529 college savings accounts, no matter how rich you already are.
And if all you’d have to do to reduce your 2013 tax bill is set up accounts to reimburse yourself for things that you’re spending money on anyway? Well, anyone who even remotely resembles our hypothetical couple and complains about these few extra steps doesn’t know what real tax pain actually feels like.
Article source: http://feeds.nytimes.com/click.phdo?i=564894f79e63c3dea8afeb3f94c21e39
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