For those who think they are saved from tax increases since their incomes are below the $450,000 threshold — think again.
Hidden from the taxpayer's radar in the new Taxpayer Relief Act of 2013 is a set of limitations on deductions — effectively a tax increase — that will impact more households than the tax rate increase on high-income earners will.
According to the Senate Finance Committee, the loss of personal exemptions (the personal exemption phase out, or PEP) can mean a 4.4 percent marginal rate increase on a married couple with two children and a combined income above $250,000.
If there were four kids, then the rate increase would be 6 percent.
Congress and the Obama administration also agreed on a limitation of itemized deductions, known as the Pease Provision.
This provision impacts itemized deductions such as mortgage interest and state tax payments. This is targeted on single taxpayers with incomes above $250,000 and on married people with incomes above $300,000.
How does this work?
Take, for example, a couple making $400,000 in income. For deduction phase outs, they are $100,000 over the $300,000 limit. If they had $50,000 in deductions, then those would be reduced by $3,000. The resulting tax bill would go up by $1,000.
Taxpayer's with more than $1 million of income may lose 80 percent of their itemized deductions, which includes the charitable deductions.
The Pease Provision is a re-enactment of a repealed tax provision originally promoted by the late Rep. Donald Pease, D-Ohio.
Both the PEP and Pease Provisions were to end in 2010. However, as part of the secret bargaining and deals negotiated between the president and GOP congressional leaders, they were revived without any fanfare.
Basically, a good part of the income the president proclaimed he compromised away actually went out the front door but in the back door — with Congress holding open both doors.
According to IRS statistics, taxpayers in so-called blue states claim, more or less, twice the amount of itemized deductions as do taxpayers in red states.
It seems ironic. Some of the president’s biggest supporters are from Hollywood, Silicon Valley and Manhattan, who are now being rewarded by having their taxes hiked and their favorite charities hammered.
The non-profit organizations and charities that high-income taxpayers support are now rightly concerned that, without the tax breaks, the rich might not feel so charitable.
It does not take much imagination to realize that the National Association of Home Builders and the National Association of Realtors are concerned about the impact of the phase out of mortgage deductions will have on a highly profitable segment of the real estate industry.
While PEP is a matter of “what Congress giveth, Congress taketh away,” the Pease Provision takes away deductions for which the taxpayers have paid. Itemized deductions are not a matter of government largesse.
When a taxpayer pays a mortgage, state tax or other money outlay listed as an itemized deduction, it is a taxpayer's expenditure and certainly not a government expenditure.
While the fiscal cliff tax compromise is widely viewed as impacting only the rich, the fact is that the real nasty parts of the deal were kept hidden from the eyes of the taxpayers.
The official published tax rates are one thing, but both political parties hope the actual tax rate and amount of tax money paid under the compromise will increase before the taxpayers realize it.
Informed taxpayers will start their planning to deal with the potential of increased tax with their tax professionals now.
While taxpayers who are unaware of the stealth tax will be hit hard.
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