TAXES

The minus and plus of 2009

June 8, 2009

>> It looks as though Congress will lower rates on middle-class incomes. Not so for tax rates on upper incomes. The higher rates include:

Top marginal rates, which could rise from the current 33 and 35 percent to 36 and 39.6 percent for couples who earn more than $250,000.
Taxes on capital gains and dividends will rise to 20 percent for couples who earn more than $250,000.
Estate taxes, for which Obama’s people have proposed a 45 percent rate when a couple’s estate exceeds $7 million, and half that for individuals.

But it’s not all bad. Congress has increased certain exemptions and credits to the Alternative Minimum Tax (AMT), which is typically (though not uniformly) paid by people with an income of $75,000 to $100,000 per year.

Exemptions include: $70,950 for married couples filing jointly; $35,475 for married people filing separately; and $46,700 for unmarried people.
Nonrefundable personal tax credits: You can use them not only to reduce your regular tax, but also your AMT tax bill. The most common credit is up to $1,000 off for each child. But there are others, less well known. Examples include higher education and buying a hybrid car. For more on the AMT: www.irs.gov/newsroom/article/0,,id=176605,00.html. Yes, it’s dry as burnt toast, but it’s clear, useful, and (of course) correct.

Self-defense:If the higher taxes affect you—or even if they don’t—you might want a few tips on how to minimize your tax burden:

The first order of business is to make sure you have minimized your Adjusted Gross Income. Best way to do that: Invest every penny you can in your 401(k). As far as the IRS is concerned, that lowers your income.

You can also reduce it by deducting alimony, student loan interest you paid, and expenses related to classes you’ve taken.

Next, hunt for ways to increase your deductions. You know about mortgage interest, state taxes, and charity. But you can also deduct car registration fees, expenses related to your job, fees paid to investment managers, and many more items.

Finally, if want to get radical, consider moving to a state that has no state income tax. Such states include Alaska, Florida, Nevada, South Dakota, Washington, Wyoming. Two states restrict their income tax to dividend and interest income: New Hampshire and Tennessee. State taxes may become more important than they used to be.

Desperate for revenue, many states are considering a hike in their income tax rates. For a list of how all states compare: www.taxadmin.org/fta/rate/06stl_pi.html.

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