The wealthiest stand to lose the most under President Obama’s proposed budget, while individuals with lower incomes could gain in many different ways.
But many of those in between — those with household incomes of $200,000 to $400,000 or so — may not see as much of a difference in their tax bills as they may have feared.
Plenty of people in this income range live in high-cost areas of the Northeast and California and stretched, rightly or wrongly, to afford their homes when real estate prices were higher.
They may not consider themselves rich at all, laughable as that may seem to people earning far less in the middle of the country.
But they’ve been worried sick as the president has persistently defined them as rich enough to pay more in taxes — at the exact moment when their jobs may be in danger or their small businesses or commission income may be suffering.
It turns out, however, that many of them were already subject to pretty high taxes because they were paying the alternative minimum tax.
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Even if the new tax increases go into effect, the amount of taxes they owe may not change much, according to Clint Stretch, the managing principal of tax policy at Deloitte L.L.C. in Washington.
That’s because the amount they owe under the regular income tax system, while higher under Mr. Obama’s plan, may not push them out of A.M.T. territory, he said.
But higher-income people in states with lower income or property taxes are more likely to pay bigger sums under the president’s proposals, depending on their income and deductions.
And Mr. Obama’s tax plan would affect people — mostly those with high incomes — who work for hedge funds or private equity firms and pay only a 15 percent capital gains tax rate on much of the money they take home.
Now, they would pay ordinary income tax rates, as much as 39.6 percent, on everything.
In any event, none of this would start until 2011, which gives the economy a chance to recover and taxpayers time to estimate the impact on themselves.
The budget proposal also contains new or improved tax breaks for low-income workers, college students and millions who earn less than $65,000 and want to save more for retirement.
Besides taxes, there are education and health programs in the new budget that will benefit people with low and moderate incomes.
Not all of these measures will survive the Congressional haggling process. This week’s proposals are probably the worst case for high-income people. But it sure looks as though some wealthy people will pay more.
Whether it’s more than their fair share is a debate for the ages. Since they are bearing the brunt of the changes, however, we’ll detail the ones that affect them.
The top two federal income tax brackets would rise to 36 percent and 39.6 percent from 33 percent and 35 percent, respectively. This would affect married couples who earn more than $250,000 in gross income, and singles who earn more than $200,000, according to Mr. Stretch of Deloitte.
Upper-income people will also find that their income tax deductions are not worth as much. Most families in the top two tax brackets itemize tax deductions. Mortgage interest, property taxes, charitable contributions and state income taxes are some of the most popular deductions.
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Under the proposed budget, however, taxpayers will get less in deductions. Currently, the benefit of itemizing increases as you move up the income ladder.
For someone in the existing 35 percent tax bracket, $10,000 in itemized deductions would reduce a tax bill by $3,500. But the Obama plan would limit that deduction to 28 percent, cutting tax liability by only $2,800.
Here’s what would happen to a married couple in New York with two children under the age of 17, a $300,000 household income and itemized deductions of $75,000 ($36,000 in mortgage interest, $6,000 in charitable contributions, $18,000 in state income taxes and $15,000 in property taxes).
Under the current tax system, they would owe $56,400 in federal taxes, which is the amount they pay because their circumstances force them to pay the alternative minimum tax.
Higher-income individuals generally need to run two calculations when they are doing their federal taxes, one under the regular tax system and another using the A.M.T.
The A.M.T. does not allow several deductions like property taxes and state income taxes. Taxpayers pay whichever bill is higher.
The couple’s total federal tax bill under the existing, regular tax system would have been $48,300, $8,100 less than the A.M.T. tax due.
That difference would shrink to $5,800 under President Obama’s system, according to Deloitte.
That would not be enough to push the family out of A.M.T. territory. Thus, they’d still owe the same $56,400. But if their income rose, that difference would shrink to zero, and the A.M.T.
amount would then become less than the regular income tax.
“At some point, you have enough income and small enough deductions that all of the Obama changes would hurt,” Mr. Stretch said.
According to the Internal Revenue Service, 27 percent of households earning more than $200,000 annually live in the Northeast and 25 percent live on the West Coast, both prime areas for the A.M.T.
People in the top two brackets would also pay more in taxes on their investments.
The rate paid on capital gains and qualified dividends would rise to 20 percent from 15 percent (middle income families, or those in the 25 percent and 28 percent tax brackets, would still pay 15 percent).
The budget would make permanent the “Making Work Pay” tax cut, which was passed as part of the Recovery Act for 2009 and 2010.
This provision provides a refundable tax credit of up to $400 for working individuals and $800 for married couples filing their tax returns jointly.
The credit begins to phase out at income levels of $75,000 for individuals and $150,000 for married couples filing jointly. Since the credit is “refundable,” you’ll get money back even if you have no federal income-tax liability.
The credit will be distributed by reducing the amount of taxes deducted from your paycheck for Social Security and Medicare.