Taxes
Posted: Fri Sep 07, 2012 4:53 pm
By Bill Bischoff
It’s officially election season. This week the Democrats hold their convention in Charlotte, N.C., following last week’s Republican convention in Tampa, Fla. Not surprisingly, the two parties are proposing starkly different tax plans for the future—something that’s likely to become a bigger issue as the campaigns head for the Nov. 6 finish line. Here’s the scoop on how the competing plans would affect individual taxpayers, as well as what’s on tap for next year and beyond if nothing changes.
Taxes on salary and other ordinary income
The Obama Plan: It would retain the current 10%, 15%, 25% and 28% rates but would raise the top two rates for higher-income folks (singles with income over $200,000 and married joint-filing couples with income over $250,000). For them, the top two rates would increase to 36% and 39.6% (versus the current top two rates of 33% and 35%). The president has also endorsed the so-called Buffett Rule, which would require households with income above $1 million to pay at least 30% in federal income taxes.
The Romney Plan: It would reduce each current rate by 20%, which would result in rates of 8%, 12%, 20%, 22.4%, 26.4% and 28% (versus the current rates of 10%, 15%, 25%, 28%, 33% and 35%).
If nothing changes: For 2013 and beyond, there will be five rate brackets: 15%, 28%, 31%, 36% and 39.6% (versus the current six brackets of 10%, 15%, 25%, 28%, 33% and 35%).
Taxes on investment income
The Obama Plan: It would keep the current 15% maximum rate on long-term capital gains for taxpayers with income under $250,000. The maximum rate would be 20% for those with income above $250,000. (Long-term gains are currently taxed at either 0% or 15%.) This plan would keep the current 15% maximum rate on dividends for everyone except those in the top two brackets. Those folks would pay 36% and 39.6%. (Dividends are currently taxed at either 0% or 15%.) The plan would retain the 3.8% Medicare surtax on investment income collected by higher-income individuals in 2013 and beyond.
The Romney Plan: It would completely eliminate federal income tax on capital gains, dividends and interest collected by individuals with income under $200,000. For folks with income above $200,000, the tax rate would be a flat 15%. (Long-term gains and dividends are currently taxed at either 0% or 15%; interest income is taxed at regular rates.) This plan would repeal the new 3.8% Medicare surtax on investment income collected by higher-income individuals in 2013 and beyond.
If nothing changes: For 2013 and beyond, the maximum rate on long-term capital gains will be 20% or 18% on gains from assets acquired after Dec. 31, 2000, and held for more than five years. (Long-term gains are currently taxed at either 0% or 15%.) Dividends will be taxed at the ordinary income rates of 15%, 28%, 31%, 36% and 39.6%. (Dividends are currently taxed at either 0% or 15%.) Interest income will continue to be taxed at regular rates. The new 3.8% Medicare surtax will hit investment income collected by higher-income individuals in 2013 and beyond.
Deductions and credits
The Obama Plan: It would eliminate “tax subsidies for millionaires that they do not need” and reduce the value of itemized deductions and other tax breaks for families with income over $250,000.
The Romney Plan: It would pay for other tax-cutting proposals by “broadening the tax base,” which means reducing or eliminating lots of deductions and credits that are currently allowed. Specifics are lacking.
If nothing changes: Phase-out rules that reduced or eliminated personal and dependent exemption deductions and the most popular itemized deductions will kick back in starting in 2013. Various deductions and credits that expired at the end of 2011 or will expire at the end of this year may or may not be extended. It’s a mess!
Alternative Minimum Tax
The Obama Plan: It would continue the practice of indexing AMT exemption amounts, which depend on your filing status, to account for inflation.
The Romney Plan: It would repeal the AMT.
If nothing changes: Middle-income and upper-middle-income folks who pay high state and local taxes and have lots of dependents will continue to be the most likely AMT victims. This add-on tax, which is assessed at rates of 26% and 28%, was originally intended to hit “rich” folks who benefit from “excessive” tax breaks. Under the current rules, the AMT fails miserably in that effort. In fact, annual “patches” to the AMT rules are required to prevent millions more middle-income households from getting hammered by the AMT.
Estate tax
The Obama Plan: It would restore the 2009 rules which called for a $3.5 million estate tax exemption and a 45% tax rate. (Under current rules, the exemption is $5.12 million and the tax rate is 35%.)
The Romney Plan: It would completely repeal the federal estate tax.
If nothing changes: The pre-Bush rules will kick back in and result in a $1 million estate tax deduction and maximum tax rate of 55%. (Under current rules, the exemption is $5.12 million and the tax rate is 35%.)
Other proposals
The Obama Plan: It would extend through 2013 the so-called payroll tax cut which reduces the Social Security tax withholding rate on wages and the Social Security tax component of the self-employment tax by 2%. So-called clean-energy tax incentives would be continued.
The Romney Plan: It would repeal the president’s signature health care legislation, which includes several unfavorable tax changes that will affect individuals starting in 2013. The fate of the payroll tax cut after this year is uncertain, and there is little enthusiasm for clean-energy tax breaks.
If nothing changes: The payroll tax cut will expire at the end of this year. Unfavorable tax changes included in the health care legislation will kick in starting next year. Some clean energy breaks will expire.
Note: Thanks to the Research Institute of America (a leading provider of tax information and research materials) for combing through budget and legislative proposals and campaign materials to compile a good chunk of the information that I’ve summarized in this article.
It’s officially election season. This week the Democrats hold their convention in Charlotte, N.C., following last week’s Republican convention in Tampa, Fla. Not surprisingly, the two parties are proposing starkly different tax plans for the future—something that’s likely to become a bigger issue as the campaigns head for the Nov. 6 finish line. Here’s the scoop on how the competing plans would affect individual taxpayers, as well as what’s on tap for next year and beyond if nothing changes.
Taxes on salary and other ordinary income
The Obama Plan: It would retain the current 10%, 15%, 25% and 28% rates but would raise the top two rates for higher-income folks (singles with income over $200,000 and married joint-filing couples with income over $250,000). For them, the top two rates would increase to 36% and 39.6% (versus the current top two rates of 33% and 35%). The president has also endorsed the so-called Buffett Rule, which would require households with income above $1 million to pay at least 30% in federal income taxes.
The Romney Plan: It would reduce each current rate by 20%, which would result in rates of 8%, 12%, 20%, 22.4%, 26.4% and 28% (versus the current rates of 10%, 15%, 25%, 28%, 33% and 35%).
If nothing changes: For 2013 and beyond, there will be five rate brackets: 15%, 28%, 31%, 36% and 39.6% (versus the current six brackets of 10%, 15%, 25%, 28%, 33% and 35%).
Taxes on investment income
The Obama Plan: It would keep the current 15% maximum rate on long-term capital gains for taxpayers with income under $250,000. The maximum rate would be 20% for those with income above $250,000. (Long-term gains are currently taxed at either 0% or 15%.) This plan would keep the current 15% maximum rate on dividends for everyone except those in the top two brackets. Those folks would pay 36% and 39.6%. (Dividends are currently taxed at either 0% or 15%.) The plan would retain the 3.8% Medicare surtax on investment income collected by higher-income individuals in 2013 and beyond.
The Romney Plan: It would completely eliminate federal income tax on capital gains, dividends and interest collected by individuals with income under $200,000. For folks with income above $200,000, the tax rate would be a flat 15%. (Long-term gains and dividends are currently taxed at either 0% or 15%; interest income is taxed at regular rates.) This plan would repeal the new 3.8% Medicare surtax on investment income collected by higher-income individuals in 2013 and beyond.
If nothing changes: For 2013 and beyond, the maximum rate on long-term capital gains will be 20% or 18% on gains from assets acquired after Dec. 31, 2000, and held for more than five years. (Long-term gains are currently taxed at either 0% or 15%.) Dividends will be taxed at the ordinary income rates of 15%, 28%, 31%, 36% and 39.6%. (Dividends are currently taxed at either 0% or 15%.) Interest income will continue to be taxed at regular rates. The new 3.8% Medicare surtax will hit investment income collected by higher-income individuals in 2013 and beyond.
Deductions and credits
The Obama Plan: It would eliminate “tax subsidies for millionaires that they do not need” and reduce the value of itemized deductions and other tax breaks for families with income over $250,000.
The Romney Plan: It would pay for other tax-cutting proposals by “broadening the tax base,” which means reducing or eliminating lots of deductions and credits that are currently allowed. Specifics are lacking.
If nothing changes: Phase-out rules that reduced or eliminated personal and dependent exemption deductions and the most popular itemized deductions will kick back in starting in 2013. Various deductions and credits that expired at the end of 2011 or will expire at the end of this year may or may not be extended. It’s a mess!
Alternative Minimum Tax
The Obama Plan: It would continue the practice of indexing AMT exemption amounts, which depend on your filing status, to account for inflation.
The Romney Plan: It would repeal the AMT.
If nothing changes: Middle-income and upper-middle-income folks who pay high state and local taxes and have lots of dependents will continue to be the most likely AMT victims. This add-on tax, which is assessed at rates of 26% and 28%, was originally intended to hit “rich” folks who benefit from “excessive” tax breaks. Under the current rules, the AMT fails miserably in that effort. In fact, annual “patches” to the AMT rules are required to prevent millions more middle-income households from getting hammered by the AMT.
Estate tax
The Obama Plan: It would restore the 2009 rules which called for a $3.5 million estate tax exemption and a 45% tax rate. (Under current rules, the exemption is $5.12 million and the tax rate is 35%.)
The Romney Plan: It would completely repeal the federal estate tax.
If nothing changes: The pre-Bush rules will kick back in and result in a $1 million estate tax deduction and maximum tax rate of 55%. (Under current rules, the exemption is $5.12 million and the tax rate is 35%.)
Other proposals
The Obama Plan: It would extend through 2013 the so-called payroll tax cut which reduces the Social Security tax withholding rate on wages and the Social Security tax component of the self-employment tax by 2%. So-called clean-energy tax incentives would be continued.
The Romney Plan: It would repeal the president’s signature health care legislation, which includes several unfavorable tax changes that will affect individuals starting in 2013. The fate of the payroll tax cut after this year is uncertain, and there is little enthusiasm for clean-energy tax breaks.
If nothing changes: The payroll tax cut will expire at the end of this year. Unfavorable tax changes included in the health care legislation will kick in starting next year. Some clean energy breaks will expire.
Note: Thanks to the Research Institute of America (a leading provider of tax information and research materials) for combing through budget and legislative proposals and campaign materials to compile a good chunk of the information that I’ve summarized in this article.