How Much Do the New Tax Changes Really Cost?


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Do you remember hearing that the tax increases were only going to be about 5% and then only hit the rich?

I’ve been doing a lot of calculating of the changes coming for my clients and I thought I’d tell you some of the results. HINT: It’s not just 5% and it’s not just the rich.

6-11-10

Wealthy Professional Couple Gets Slammed With Taxes

Let’s add up some of the proposed and passed taxes to date that one of my clients will be subject to:

Increase #1:
2011: Tax bracket increase by 3% and 5%

Increase #2
2011: Self-employment tax (15.3% if haven’t hit limit, 2.9% if limit has been hit)

2013: 3.9% surtax on earned income if income over $250,000

Increase #1:
The first tax rate hike will come about when the Bush Tax Cuts expire. From all the news I’ve seen, the two highest brackets will see an increase from 33% to 36% and from 35% to 39.6%.

The media got it wrong when doing the calculation for the impact of this increase. Going from 35% to 39.6% is not an increase of almost 5%, it’s an increase of 13.14%. (If you had $100,000 at this bracket your tax went from $35,000 to $39,600, which is more than 5%)

And the tax bracket system we have means that your income tax is calculated at each level. So an increase at the top level isn’t all you have. You also have an increase at the level right below that. What used to be taxed at 33% is now taxed at 36%.

Increase #2:
This one isn’t law yet. The Senate is going to let us know soon whether S Corporation earnings will become subject to self-employment tax. If they are higher income, their increase will be just 2.9%. But if they aren’t, their increase will be 15.3%. (HEY! What happened to only taxing the rich? Tomorrow we’ll look at how much this will cost the average small business owner.)

Increase #3:
We have until 2013 before this change takes effect, but this is already penned into law. It’s part of the Health Care Bill. The 3.9% surtax will apply to earned income for my client (and you too, if your income is over $250,000)

When it’s all said and done my client is looking at an increase of 44% in taxes by 2013.

Tax planning has never been more important.



One Comment

  1. Megan Hughes says:

    It’s a frustrating time to be a business owner … we’re supposed to save the economy, create new jobs, and take tax increases at the same time.

    Looks like the S Corp tax may have some modifications coming, at least according to what I read today. I hope that’s true!

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