TRAVERSE CITY — Tis tax season once again.
Here’s a not-so-bold prediction. This season is going to be less fun for big earners.
As a result of a last minute deal, President Obama and the Republicans added new tax changes upon previously planned tax changes. Out went the Bush tax cuts and in came what could aptly be called the Accountant Job Security Act of 2013. As is normally the case, competent tax advisors are needed now more than ever.
Given the legislatively-planned death of the Bush tax cuts, I will highlight some of the ways the most financially fortunate among us will be impacted. It should be said at the outset that someone has to pay for our government services. After all — at least in theory — even the Fed’s printing press has its limits. This leaves little choice other than increasing taxes on the only group that’s able to pay more. This group — the proverbial 1 percent, as it were — is an awfully easy target.
To gain an appreciation for the complexity of our current tax code, take special note of the varying income thresholds used throughout this article. You may gain an awareness that even the sharpest tax pros around have difficulty analyzing, let alone explaining to clients, how our tax system actually functions. Its gotten that out of whack.
To start my review, last year’s tax deal brought back the Clinton-era’s highest marginal tax rate of 39.6 percent. This layered on an extra tax of 4.6 percent on income above $400,000 for singles and $450,000 for those filing as married. This change fulfilled a key campaign promise by President Obama.
Moving on, higher earners will once again become acquainted with the Pease and PEP phase-outs, also brought back from the Clinton years. The term phase-out is just a fancy way of saying, as you earn more, you are going to systematically lose the benefit of popular tax deductions — such as mortgage interest, property taxes, state taxes, charitable donations and even personal exemptions. Both the Pease and PEP phase-outs begin to take effect at a different level of income threshold of $250,000 for singles and $300,000 for married taxpayers.