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The Stealth Tax:

How the Federal Government Squeezes Additional Tax Dollars Out of High Income Taxpayers

 

Your Initial Financial Plan:


Looking For a CPA, Lawyer or Financial Advisor who has worked with lots of other newlyweds and is familiar with the issues that affect you?  

If you're a high income taxpayer, you're well aware that you pay a heck of a lot of taxes each year. The top federal tax bracket is currently 39.1%. The next highest tax bracket is 35.5%.

But did you know that if you are a high income taxpayer, you actually pay taxes at rates higher than those listed above? The 39.1% tax rate and the 35.5% tax rate are the two top stated tax rates. Actual tax rates exceed these stated tax rates for high income taxpayers due to some sneaky rules, known as the stealth tax, passed into law by congress a few years back.

  • Itemized Deductions: Most high income taxpayers itemize their deductions. If your income exceeds $132,950 (in 2001) , you're required to "phase out" your itemized deductions by 3% of the excess. For example, if your adjusted gross income is $232,950, you would be required to reduce your itemized deductions by $3,000 [(232,950 - 132,950) * 3%].

  • Personal Exemptions: For 2001, taxpayers are entitled to claim a personal exemption of $2,900 for themselves, their spouses, and their dependents. Married couples whose income exceeds $199,450 will need to phase out their personal exemptions. And once their income exceeds $321,950, they'll no longer receive any tax benefit for themselves, their spouse, or their dependents.

So What Can You Do?

  1. Take full advantage of all retirement savings opportunities since amounts contributed to retirement plans will generally reduce your taxable income and will grow tax deferred.

  2. Own where you live since mortgage interest and real estate taxes are tax deductible and, when you sell your home, up to $500,000 of the gain won't be taxed.

  3. Buy and hold a portfolio of stocks and tax-efficient mutual funds since gains on investment assets held for more than one year before being sold are only subject to federal income taxes at a rate of 20%.

Relief is On The Way

  • The limitation on itemized deductions for higher-income taxpayers, which can result in their losing up to 80% of their itemized deductions, will be gradually repealed starting in 2006.

  • The phase-out of the personal exemptions for higher-income taxpayers will be gradually repealed beginning in 2006.

 

 

 

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