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Taxing the rich

 

By Randy Neumann

Tax the rich, feed the poor till there are no rich no more.  I’d love to change the world, but I don’t know what to do, so I’ll leave it up to you.
Lyrics from “I’d Love To Change The World”
Ten Years After

This song was sung by a blues/rock band from Nottingham, England, where Robin Hood allegedly stole from the rich to give to the poor.  They took their name because it was 10 years after what lead singer, Alvin Lee, considered the birth of rock ’n’ roll due to the great year that Elvis Presley had in 1956.  They played at Woodstock, and “I’d Love To Change The World” made it to the Top 40 chart here in the U.S.
On Oct. 14, 2008, candidate Barack Obama met Joe Wurzelbacher, a big, bald man with a goatee, a.k.a., Joe the plumber.  Joe said to Obama, “I’m getting ready to buy a company that makes $250,000 to $280,000 a year.  Your new tax plan is going to cost me more, isn’t it?”
Candidate Obama’s answer – which lasted five minutes 46 seconds – mentioned a 50% tax credit that will entitle the taxpayer to a tax cut for health care costs.  Taxes would go from 36% to 39%, which is what it was during Bill Clinton’s administration, along with many other things.  He ended with, “When you spread the wealth around, it’s good for everybody.”
In 2013, “wealthy” Americans will pay extra Medicare taxes.  Congress, President Obama and the IRS are putting a surcharge on the wealthy to help fund the health care reforms.
1.  Beginning in 2013, joint filers with adjusted gross incomes of $250,000 or greater and single filers with adjusted gross income (AGI) of $200,000 or greater will have to pay 0.9% extra in FICA taxes (that is, Social Security and Medicare taxes).  The employers of these taxpayers do not face an increase.
2.  Joint filers with modified adjusted gross income (MAGI) of $250,000 or more and single filers with MAGI of $200,000 or more will be docked with a 3.8% tax on investment income.  (Even estates and trusts will be subject to this new 3.8 percent levy.)
What might the dollar impact be?  The Tax Foundation thinks that the richest 1% of American families will pay an average of $52,000 more in federal taxes by 2016.
What are the chances of these tax hikes being repealed?  Think slim and none.  Basically, you’d have to repeal the health care reforms to make it happen.
How can you avoid the 3.8% tax on dividends, capital gains & interest?  It won’t be easy.  Real estate investors may luck out the most because federal law characterizes rental income as “active” rather than “passive.”  On the other hand, if you sell a home you’ve owned for decades and see a taxable gain above the home sale exclusion ($250,000 single/ $500,000 married), you’ll face the 3.8% tax.
Some forms of unearned income won’t be slapped with the tax.  IRA distributions and income distributions from 401(k), 403(b) and 457(b) plans will be exempt.  The same goes for pension income and Social Security income.  Annuities that are part of a pension plan will be exempt.  Business income won’t be hit with the 3.8% tax either.  Veterans’ benefits, life insurance payouts and interest earned by municipal bonds will also be spared.
As a result of this tax, you might start to see subtle shifts in financial strategy.  You might see more muni bond purchases, more interest in life insurance and more installment sales.  As qualified Roth IRA distributions don’t boost AGI, you might be looking at another factor promoting Roth IRA conversions.  Also, everyone might think about taking some capital gains prior to 2013.  (Restrictions, penalties, and taxes may apply.  Unless certain criteria are met, Roth IRA owners must be 591/2 or older and have the IRA for five years before tax-free withdrawals are permitted.)
According to Wealth for the Common Good, the wealthiest Americans have paid less tax in recent decades.  A press release from the group notes that “America’s highest earners — the top 400 — have seen their share of income paid in federal income tax plummet from 51.2% in 1955 to 16.6% in 2007, the most recent year with top 400 statistics available.”
So, how can you reduce your taxes in 2013?  It is not too early to think about it.  You might want to meet with a financial planner to discuss this topic, or read up on your options.
World pollution, there’s no solution.  Institution, electrocution.  Just black and white, rich and poor.  Them and us, stop the war.
More lyrics from “I’d Love To Change The World”
Ten Years After

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual.  Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial.  Member FINRA/SIPC.  He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.

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