The House of Representatives agreed at 11 PM on January 1, (mostly along partisan lines with 85 Republicans voting in favor and 16 Democrats against) to adopt without change the Senate bill passed the day before to raise taxes on America's wealthiest taxpayers in 2013. The bill passed the House with a vote of 256-171.
The law makes "permanent" the temporary Bush tax cuts and Bush tax cut extensions that were extended for two years at the end of 2010. The current tax rates of 10, 15, 28, and 35 are kept in place for taxpayers earning less than $400,000 ($450,000 for a married couple). But for folks earning more than these figures, the additional pre Bush tax cut rate of 39.6 is restored. For people earning more than $250,000 ($300,000 per couple), however, the personal exemptions begin to be phased out, so they too will pay more under the new legislation. The average person in this category will pay approximately 2 percent more in tax.
The revenues generated by these tax increases are estimated at $650 billion to the Treasury over the next ten years. The GAO, (Government Accounting Office) a non-political arm of the Government estimates, however that the new law adds $4 Trillion to the deficit over the same 10 year period.
So, while the automatic and across the board spending cuts and tax increases may have been averted with the last minute legislation, the new tax law only exacerbates the current deficit situation by raising some taxes on wealthier Americans and doing virtually nothing to curb runaway spending, including projected automatic spending INCREASES. The nominal cuts (in future spending) are offset by tax increases on a 41 to 1 ratio. The real cuts have been pushed off for another Congress and another day. To put this is context, when Ronald Reagan agreed to some tax increase with the Democratic House Speaker "Tip" O'Neill, he extracted three dollars in spending cuts for every one dollar in tax increase. The current law cuts just over two cents in future spending for every dollar in new tax.
In addition to the increase to the top income tax rates, the tax rates for capital gains and qualified dividends for the wealthiest Americans also increase from 15 percent to 20 percent, plus the addition of the new Obama Care health tax of 3.8 percent for a total of 23.8 percent. For retirees who live on this type of investment income, their tax bills will increase a whopping fifty-nine percent.
The current bill also allows the payroll tax reduction of two percent on employees at ALL income tax brackets to expire. This will affect the lowest paid workers who pay no tax by an average of $300 per year. For mid-level workers earning $75,000 to $100,000 per year, the increase will be in the neighborhood of $2000 per person. Seventy-seven percent of all households will be affected by these tax increases.
If there is anything positive in the tax bill, the current exemption from gift and estate tax has been maintained at just over $5 million per person, but the tax rates on estates over those amounts increases under the new law from 35 to 40 percent. The maintenance of this exemption amount should allow most people an opportunity to protect a significant portion (if not all of their wealth) in an asset protection and estate structure that will avoid all future estate taxes. Without the new tax laws, the exemption amount would have been reduced 81 percent to $1 million and the estate tax would have increased to 55 percent. So for folks with family farms, small businesses and those able to amass an inheritance for their kids and grandkids, the maintenance of the current gift and estate tax exemptions at the $5 million level is perhaps a silver lining amongst the storm clouds of this tax bill.
In part two of this article, we’ll talk about how these tax changes will affect people living and working abroad and how other countries are responding to the bill.
Joel M. Nagel is an international lawyer and entrepreneur focusing his practice in the area of asset protection, cross-border transactions, and global investment. He speaks all over the world on the topics of asset protection, global banking and investment, and international legal compliance.
Joel has written articles and has been quoted by Forbes, Fortune, Live and Invest Overseas, Hemispheres Publishing, Sovereign Society, Sovereign Man, Stansberry Research, Oxford Club, Pirate Investor, True Wealth, Islands magazine, Business Times, Physician’s Money Digest, and the Simon Letter. He also hosts a weekly radio program called the “Global Legal Advisor” broadcast over the Web on the Overseas Radio Network. Joel can be reached through his website www.Nagellaw.com or by telephone at +412-749-0500.