If You Have High Income, Your Taxes Are Going Up

By :: April 8th, 2014

As the April 15 deadline for filing 2013 income taxes nears, most of us are finding that Uncle Sam will take about the same share of our income as last year. But the story is very different for people at the top of the income ladder. Their taxes are going up, in many cases by a lot.

Last year, the American Taxpayer Relief Act (ATRA) extended the Bush-era tax cuts for most Americans but restored higher pre-Bush taxes for high-income households. The top tax rate reverted to 39.6 percent for taxable income over $400,000 for singles and $450,000 for couples. And after a three-year hiatus, the phaseout of personal exemptions (PEP) and the limitation on itemized deductions (Pease) resumed for taxpayers with adjusted gross income (AGI) over $250,000 ($300,000 for joint filers).

Virtually all of the tax increase from those provisions and the higher top tax rate falls on those at the top of the income distribution: TPC estimates that after-tax income of the top 1 percent will fall by more than 3 percent.

In addition, the Patient Protection and Affordable Care Act (ACA) created two new taxes that were aimed directly at high-income folks and are showing up for the first time on their 2013 tax returns. The Net Investment Income Tax adds an additional 3.8 percent income tax on dividends, capital gains, interest, and other investment income, while the Additional Medicare Tax adds a 0.9 percent tax on wage, salary, and self-employment income. Both taxes kick in when AGI tops $200,000 for singles or $250,000 for couples. Those thresholds are not indexed for inflation (in contrast to tax brackets, PEP, and Pease) and the two taxes will therefore affect more taxpayers in the future. TPC estimates that almost 90 percent of the tax increase will fall on the top 1 percent this year, cutting their after-tax income by nearly 2 percent.

Congress did the rich one small favor in ATRA by permanently adjusting the alternative minimum tax (AMT) for inflation. After a decade of patching the AMT every year or two, lawmakers permanently indexed its exemption, tax brackets and exemption phaseout. As a result, the AMT will affect relatively few additional taxpayers each year, rather than the tens of millions who were at risk of owing additional tax as they waited for Congress to patch the AMT again.

Because the AMT is now indexed and their regular taxes are rising, some high-income taxpayers will face a smaller AMT bill this year. Of course, that’s little comfort since their overall tax bill will still go up—the ACA taxes apply regardless of whether you owe AMT.

How does that happen? The AMT is the difference between your regular tax and an AMT calculation that limits your use of certain deductions and credits. You figure both measures and your total tax is the higher amount. If the AMT calculation doesn’t change but your regular tax goes up, the difference—your AMT—goes down. As a result, you owe the same amount of tax but since your regular tax is higher, your AMT is correspondingly smaller.

High-income taxpayers have been in President Obama’s crosshairs since he announced his campaign tax plan at a 2007 TPC event and tax hikes for the wealthy have been in every one of his budgets. After five years in office, the president has finally gotten a big part of what he wanted. But he’s not finished. Still on his to-do list are a 30 percent minimum tax for millionaires (the Buffett Rule) and a limit on the value of certain tax expenditures that would significantly boost taxes on high-income households.

11Comments

  1. Jack Gallagher  ::  12:56 pm on April 8th, 2014:

    Finally, someone on the Tax Vox blog who makes sense and doesn’t try to spin the news politically…

    Thanks Robert!

  2. AMTbuff  ::  1:54 pm on April 8th, 2014:

    With President Obama having set a precedent for unlimited executive modification of the law, what’s to stop a future Republican President from waiving the 3.8% ACA tax?

    “Congress did the rich one small favor in ATRA by permanently adjusting the alternative minimum tax (AMT) for inflation.”
    That was no small favor; it was a large gift that keeps on giving. It also ended the tiresome and phony debates in which Republicans and Democrats would use different baselines.

    I am still amazed that Democrats thought that the biggest recession in 75 years on the eve of retirement of the Baby Boomers was the ideal time to take out yet another mortgage on our future by enacting an expensive new entitlement program. As if the government weren’t speeding fast enough toward the fiscal cliff.

  3. Michael Bindner  ::  3:21 pm on April 8th, 2014:

    I think that the Buffett Rule is a placeholder for having a tax agenda. His solution certainly does nothing to change it (although he definitely raised Buffett’s tax bill in relation to that of his secretary (who, by the way, is not poor – so her bill probably went up too). The only way to really undo the Buffett advantage is to remove the cap on Social Security – although the ACA essentially does that, at least in part, by taxing non-wage income. Shifting the employer contribution from a payroll tax to a VAT or Net Business Receipts Tax would certainly do that – especially if the employer contribution were credited equally.

    The important takeaway, however, is the note that this year’s filing (effective on income starting January of last year) fulfills most of what Obama ran on. This is the reason why Baucus and Camp’s tax reform plans are merely posturing, with no chance of passage, ever.

  4. Jack Gallagher  ::  3:25 pm on April 8th, 2014:

    That is not the only way to undo the “Buffet advantage.” Congress could reduce his secretary’s marginal rate on ordinary income (combined with her social security tax rate) to no more than the long term capital gains tax rate.

    Why does everyone assume that equalization of rates can only be achieved by raising the tax rate on capital?

  5. Ralph H  ::  4:32 pm on April 8th, 2014:

    Let’s recognize Obama’s increases for what they are — designed to suck money out of well off professionals (particularly dual income), all the while letting the really wealthy protect their income while pandering to minimum wage workers and students. Very wealthy people like Mr Buffett, hedge fund partners and “Old Money” bond clippers benefit from our tax code. Buffett & Gates “earn” less than .1% of their net gain in a year in income. Hedge fund guys got hit a little but still exclude more than half their income due to “carried interest”. Muni Bond clippers may even show AGI of less than $250K. Meanwhile a couple of MDs who after studying until their early 30’s finally get to be screwed because they are suddenly “rich”, even if they owe $500K in student loans.

    Meanwhile we subsidize even more of the “bottom 40%”. Just not fair. I used to think Mr Devany, a commenter on this site was nuts until I saw the light.

    To name a tax amendment after Me Buffett (who otherwise I really admire) is really egregious. He has essentially paid no tax on his Billions and now wants a big pat on the back for donating it (tax free)!

  6. Tax Roundup, 4/9/14: Common K-1 problems. And: if the preparer doesn’t have a brain, give him a diploma! « Roth & Company, P.C  ::  8:33 am on April 9th, 2014:

    […] Roberton Williams, If You Have High Income, Your Taxes Are Going Up (TaxVox) […]

  7. Randy  ::  1:33 pm on April 9th, 2014:

    I seem to remember Obama proclaiming (in 2013) “The rich are finally paying their fair share.” I suppose he’s changed his mind…. As long as the income tax continues to be focus, GOOD, because when the day comes for a “Wealth Tax” (and Congress is considering it), we’re in trouble. Remember, Congress wants things JUST the way they are or they would change them – it’s in the hands of the 535 Congress members and the President alone.

  8. Terry Donovan  ::  2:13 pm on April 9th, 2014:

    I have never seen a president devide and personally attack American citizens that had different views than him. The MSM is to busy patting themselves on the back for getting elected the first half white half black president or they can’t quit bl-wing him long enough to see how little people listen to them. I have not read a newspaper for the last 5 years. Obama was an episode that now we have that out of the way we will be just like Canada & their boy wonder Pierre Trudeau from the 70’s spending the next 20 years cleaning up the f-cking mess this idiot Barry has made for us. Name one thing he has done good for this country, just one.

  9. Spinner  ::  3:43 pm on April 9th, 2014:

    You bring up the Wealth Tax. That is spot on. Congress and big government would ultimately love to have access to what you have earned and saved. Save $100 and pay taxes on the interest AND taxes on the net. Invest $100 and pay taxes on its value, even if you don’t sell (and then when you do, pay taxes on the growth). How much do we want to discourage savings?

  10. Taxing Times on the Hill and on Returns  ::  2:22 am on April 11th, 2014:

    […] incomes: Higher taxes. TPC’s Bob Williams offers a heads-up for high earners–especially those in the top 1 percent: Last year’s American Taxpayer […]

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