I apologize for my simplistic reading of the tax code, but what I’m seeing seems to indicate that Obama wants to eliminate the Bush tax cuts for single people making below 200,000 and married couples making below 250,000. It’s that 250,000 number that seems odd in comparison to the 200,000 number.
I’m sure that there are quite a few married couples who each make below 200,000 individually, but combine to make more than 250,000 (ie, each makes somewhere between 125,000 and 199,999). These are pretty normal incomes for established professionals in urban areas.
Would such a couple benefit financially by getting a divorce (or at least filing separately)?
I haven’t done any number crunching but in general, married-filing-separately has proven to be the worst of all possible worlds, tax-wise, due to how things phase out, limits on credits, etc. We personally had precisely one year where it was beneficial to file separately (the first year that IRA deductibility was phased out if you had a pension plan - but the spouse could deduct if he filed separately and had no pension plan). They closed that loophole the following year.
If you have incomes over $250k jointly, filing separately is no longer such a big deal. The reason MFS hurts most couples is that they lose benefits like the child tax credit and IRA contribution limits… but those start expiring at $125k and $170k even for married couples. By $250k, a married couple has already lost those.
(I’m not saying they’re exactly on par with singles, just that much of the damage has already been done by having a high tax rate. In particular, MFS will still be worse for couples with one wage earner.)
I would bet that Obama’s provision will contain some kind of MFS provision that will make sure separate filers still pay extra tax. I don’t know if that’s already proposed or not, but it seems likely to be there by the end of the process.
I always hear that MFS is worse because of losing these deductions, but my wife and I (who are in this boat of making less than 200K each, but more than 250K combined) already lose almost all deductions anyway. Seems that we might be better off filing separately.
I don’t know how these rich guys end up paying single digit percentages on their taxes! Between loss of deductions and the AMT, we get creamed every year! I need a better accountant (by which I mean I need an accountant, period).
Your problem is that you earn you money mostly through work. There are not a lot of opportunities to manage the taxes on ordinary income. The very rich who have sub 20% tax rates get most of their income from various investments which are structured to minimize taxes.
Try it and see. But it’s not likely to benefit you unless your situation is a little bit unusual. Don’t forget that MFS is not the same thing at all as filing Single, which you are not allowed to do.
Are they actually paying single digit taxes? Or just lower than the same kind of income if earned?
We have some income from dividends and the lowest rate we can get on those is 15% (ditto capital gains). What other tricks can the very rich use to get the taxes that low?
Don’t get me wrong - 15% of, say, 300,000 is a lot less than the marginal rate on that same 300K if earned (34% or something?).
I’ve always kind of wondered about all these “tax shelters” we keep hearing about, and whether they really do much. I’m not rich enough to be able to take advantage, anyway!!
FiveYearLurker, you can play with the numbers relatively easily, for last year at least, by plugging them into your tax software (if you have any), or maybe you can enter them into one of the online tax tools and see how they shake out. It doesn’t cost anything to try the online tools unless you file.
With this year’s changes, who knows… I’ve heard recently that the AMT cutoff, which was never indexed for inflation, has apparently been getting a “this year only” update, every single year - but that hasn’t passed yet for this year (and may not). So we may trip the AMT for the first time.
Regarding things wage-earners can do: not much, beyond taking advantage of whatever pretax vehicles your workplace offers. Someone who isn’t eligible for a deductible IRA can put a lot aside in a 401(k) pretax (though that’s just delaying the tax hit). That in and of itself can help with reducing phaseouts by getting your taxable income down.
The rich in the US - are not paying single-digit rates for income taxes. People like Warren Buffet are paying something like 17%, and that’s mostly because of capital gains and qualified dividends taxed at a maximum of 15% and then a little bit of ordinary income mostly taxed at 35%.
For rates like that, you just need to make investments in stock. Real estate is also popular. Look into tax-exempt interest sources like municipal bonds. (If you don’t have an accountant and an investment adviser, go find one of each.)
It’s certainly worth looking at how MFS compares with MFJ. My tax software gives me a report that lets me do a quick comparison for my clients (any accountant is going to have this). About twice a year, a client comes out better MFS than MFJ, often because of state issues rather than federal. (So… less than 1% of the time in my practice.)
Quite possibly so, at least as far as current income tax goes. Family friends were separated for a number of years; they only finally divorced when the tax laws made that a better choice (I don’t know how they filed while still married).
There are longer-term issues with that, of course, specifically inheritance (and possibly others). Inheriting an IRA from a spouse means you can treat it like your own IRA regarding distributions; inheriting it from someone else means you have to start taking distributions much sooner (e.g. I get a few hundred dollars every year from my mother’s IRA). Property passes to a spouse free of inheritance tax (I think). Pensions work better if there’s a spouse, at least assuming you want to take the pension that way (vs. all for yourself and when you’re gone, so’s the pension). Social Security may work better also.
So I think the deal is: divorce now and remarry right before one of you dies or retires ;).
The “Bush tax cuts” will automatically expire on 31 December 2012, unless Congress decides to extend them, in part or in whole. It is a decision belonging to Congress, and not the President. Obama has stated he will not support a bill allowing continuation of the tax cuts for those making more than $250,000.
"Warren Buffett has now released a few more details about his 2010 tax bill which show he paid just 11.06% of his adjusted gross income in federal income taxes last year—considerably less than the rate for the 400 highest income taxpayers, or for folks earning $100,000 to $200,000 a year. "
The reason is these comparisons are always made on AGI (adjusted gross income) and not taxable income. The latter is the former after deductions like charitable contributions and other deductions like state income tax.
Note that state income tax is deductible but SSI tax is not. This makes a huge “penalty” for wage income relative to investment income. Even if you think of the SSI “tax” as a retirement savings deduction, one would think it should be deductible just like IRA payments are.
Yeah, if you want to measure it as a percentage of AGI, then you can get a percentage that is lower. The problem is that you wind up comparing apples and oranges if the number gets tossed around out of context. In fact, even a statement like “Buffet’s tax rate was below the minimum statutory rate of 15%” is very misleading. The statutory rate of 15% is calculated on TAXABLE income, not on ADJUSTED GROSS income.
To me, mixing AGI and taxable income in the same sentence is like saying “Water doesn’t freeze at 32 degrees in Europe” simply because Europeans use C and Americans use F. It’s misleading to the point of dishonesty.
Well let’s be clear then… Congress can’t just decide. As you pointed out yourself, if they decide a certain way Obama won’t support it.
On the general subject of the “marriage penalty”, I believe that the Obamacare related taxes do have a marriage penalty factor. No details at the moment however…sorry.