Hi Didi,
As in many cases in the tax code, it is the phase outs that cause the most harm to middle / upper middle class taxpayers.
AMT would actually be almost reasonable, except for:
1. The taxing of income not yet realized with ISO's. They really nail people with this one because of the wording of Incentive Stock Options that have preferential treatment under normal tax code. They are "Qualified" options.
2. The treatment of state and local taxes as preference items. Preference items should be things high income taxpayers CHOOSE to take, in an attempt to avoid taxes, not where they happen to live. From a federal tax perspective, why should someone in a high tax state pay more Federal taxes. That makes no sense to me.
3. The phase out of the exemption.
Married filing jointly are allowed an exemption of $58,000. However this begins to phase out at $150,000 in income at a 25% rate.
This results in the following "Marginal Tax Rates":
From $58,000 up to 150,000 is 26%
From $150,000 up to $216,400 it is 32.5%
From $216,400 up to $382,000 it is 35%
Over $382,000 it is 28%
The negative impact on the middle class is directly related to the phase outs. Why should someone making an extra $1000 from a base of $225,000 pay $350 in Alternative Minimum Taxes when the guy that is making $1,000,000 only pays $280 on the same increase.
Phase outs are regressive, hidden taxes on the middle class and complicate the tax code. I believe all such devices should be removed from the code and adjust the tax rates to remain revenue neutral. This would shift the burden upward, where it belongs.
A better approach is simple. Eliminate teh pahse out and raise the second rate! If the second rate was 30%, rather than 28%, there would be no marginal tax rate decreases along the curve and taxpayers making over $1,045,000 would see a tax increase.
A deductible IRA? Only if you make below $60,000 is it fully deductible. Otherwise, it is phases out over the $10,000 up to $70,000. What does that do to marginal rates at $60,000 with a $3000 IRA? Should be 15% assuming $9500 standard deduction and 2 exemptions at $3050 each, you pay tax on $41400 (With your fully deductible IRA deduction.) But if you earn 10,000 more, you loose all of the $3000 IRA deduction and pay tax on $54,400. Marginal Tax Rate = 19.5%. Then back to 15% for the next couple thousand. What sense does that make? Don't people making over $60,000 need to retire? What is magical about $60,000?
And, of course, there's the Roth IRA. You can fully fund one if you make less than $150,000, but if phases out over the next $10,000 and you can't fund it at all over $160,000. I thought $60,000 was a magic number?
The same issue exists in the treatment of Schedule B deductions. There, if your (Married, filing jointly) income is greater than $139,500, you begin to loose otherwise legal deductions, at a rate of 3%. The phase out, in effect, increases your taxable wages by $1030 for each $1000 increase in wages. Marginal Tax Rates are effectively 3% higher than nominal:
25% is actually 25.75%
28% is actually 28.84%
33% is actually 33.99%
35% is actually 36.05%
For those taxpayers that did the required planning and had legal deductions.
Isn't it simpler to say: Deductions are always deductions, exemptions are always exemptions, and simplify the tax code by adjusting the percentages.
Simpler with less forms and fairer because the Marginal Tax Rate should NEVER increase and then decrease as income goes up. The intent of the phase outs was to take a benefit away from those high income people. But the ones in the middle are the ones most hurt.
Sorry for the rant...
Ira |
