TAXES: Obama vs. Romney and what it means to you!

Well it is time to get into one of the most important topics this election season:  Individual income taxes, which represents 47% of the entire federal budget. There is one big battle after another when it comes to Obama vs. Romney and their plans to save the American tax system.  Of course both plans are radically different, and the debate on the topic is sure to continue ad nauseum. I  DO feel there is need to reform the system.  We need to make the code simpler. But where to make the required cuts and how to pay for them is not known at this time.  Also, Mr. Romney has not made clear many of the cuts he would need to make.

So where do the candidates stand? Let’s take a look:

Individual income tax rates

On the issue of individual income tax rates: the current progressive system has rates that start at 10% and graduate to 15%, 25%, 33%, and 35%.

President Obama would make these rates permanent for those making less than $200k per year ($250k for marrieds).  He would raise the tax on the folks in the top 2 brackets to 36% (from 33%) and 39.6% (from 35%).

Mitt Romney wants a flat 20% tax cut across the board, thus cutting further the tax cuts of Bush from 2001 and 2003.  The top rate would fall from 35% to 28% and the bottom from 10% to 8%.

Who are the people who are at risk if President Obama’s program gets passed? According to US Census data, households with incomes of more than $200,000 a year are likely to live in the well-to-do suburbs of major cities in the South (Florida), the West, and the Northeast.  The Urban Institute and Brookings Institution estimate that over 6 million Americans earned above $200,000 in 2011, which represents the top 4.2 percent of taxpayers. Their income, an estimated $3.5 trillion, represents 33% of all the cash income earned.

Capital Gains or Investment income tax rates

On the issue of Capital Gains or Investment income tax rates, a wide gap exists.   Long Term (greater than 1 year) Capital gains and certain qualified dividends are taxed at 15%, and interest is taxed at the ordinary rate.  If you are in the 10% or 15% bracket, you may actually have a 0% capital gains tax rate!

President Obama would raise the rate to 20%, and tax dividends as ordinary income for the high income families only.

Mitt Romney would keep the 15% investment income tax but would eliminate ALL taxes of capital gains, dividends, and interest for those families making up to $100,000 if single and $200,000 if married. Romney also wants to repeal the health care law, which would save the “high” income families .9% Medicare tax on earned income and 3.8% Medicare surtax on unearned income (starting in 2013).

A significant amount of the income for the rich comes from sources other than wages, such as business income, corporate bonds, or capital gains. In the case of capital gains, the tax rate will rise from 15 percent to 23.8 percent for those with incomes over $250,000 if Congress does not renew the Bush-era cuts.  According to the Tax Policy Center, people making more than $1 million got 42 percent of their income from such capital income.

Carried Interest Tax Rate

Most do not know exactly what this is.  People who manage private money, hedge funds, venture capitalists; these individuals get preferential treatment when it comes to taxes.  Their income is called carried interest and is taxed at 15%.  It represents their portion of the profits on the funds they manage.

President Obama would treat this income as ordinary income, which could be as high as 39.6% under the President’s plan.  This is sure to raise the fees of these money managers.

Mitt Romney has hinted he is open to the possibility of raising the rate, but has not said 100% so as of yet.

Alternative Minimum tax

President Obama would index the AMT for inflation, so millions of middle class families don’t get hit by this tax.

Mitt Romney would abolish the AMT entirely.

Estate Tax

President Obama would roll back the tax levels to 2009, meaning that estates over 3.5 million would face a top rate of 45%.  If congress does not act, estates worth more than 1 million could be taxed at 55% starting in 2013!

Mitt Romney would appeal the estate tax and preserve the gift tax rate at 35%.

As with any tax planning, please consult your tax advisor with any individual questions you may have.  Please click below to listen to Win Damon and I review this topic on WNBP Radio 1450 Newburyport!

With more than 23 years of experience as a credentialed tax professional, Stu Steinberg, CPA, MBA brings a broad depth of knowledge to his work. He has worked with families and small business entrepreneurs for many years helping them plan more effectively. He can be reached at or (781) 247-5569 anytime.

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