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1 Nick Kasprak, The $250,000 Threshold: How Does It Work 1 (2012)

handle is hein.taxfoundation/ffdbjxz0001 and id is 1 raw text is: FUDTOFiclF act
July 12, 2012
No. 319
The $250,000 Threshold: How does it work?
By
Nick Kasprak
President Obama's proposal to let the Bush tax cuts expire for married taxpayers making over $250,000 and
single taxpayers making over $200,000 sounds simple enough. If you make less than those amounts, nothing
changes; if you make more, you pay the old Clinton-era tax rates. Right?
As with anything related to the federal income tax code, things are much more complicated than they seem.
For one thing, the Bush tax cuts included much more than just marginal rate reductions-they also changed
the way dividend income is taxed, reduced capital gains tax rates, and phased out various limitations on
exemptions and deductions for upper income taxpayers. Additionally, marginal tax rates apply to taxable
income, while President Obama's thresholds apply to adjusted gross income (AGI). Finally, the president
first proposed those $200,000/$250,000 thresholds back in 2009; using the same numbers four years later in
2013 would cause this tax increase to affect significantly more taxpayers than initially intended because of
inflation, and the official proposal in his 2013 budget indexes those thresholds using a 2009 base year. Thus,
when President Obama talks about letting the Bush tax cuts expire for families earning over $250,000 and
single filers earning over $200,000, he really means $267,000 and $213,600, based on our projections.
The marginal rate increases are relatively straightforward, but only if one knows the difference between
taxable income and AGI. Taxable income is simply AGI minus personal exemptions (projected to be $3,900
per dependent in 2013, plus an additional $3,900 for the head of the household) and deductions (in 2013,
projected to be a minimum of $6,100 for single filers and $12,200 for married filers, plus more if the
taxpayer itemizes.) So for an AGI of $267,000 (which is the $250,000 threshold adjusted for inflation to
2013), the applicable taxable income threshold is $267,000 - $12,200 - (2 x $3,900): that's subtracting the
standard deduction for married filers and two personal exemptions (one for each spouse.) That comes out to
$247,000.
Under current policy, there are six taxable income brackets-10%, 15%, 25%, 28%, 33%, and 35%. The
president's proposal would let part of the 33% tax bracket and the entire 35% tax bracket rise to Clinton-era
tax rates: 36% and 39.6%.' The split in the 33% tax bracket (where the upper part goes up to 36%) is set to
Office of Management and Budget, The President's Budget for Fiscal Year 2013: Analytical Perspectives, at 201,
htnp:/iavrx.whkehouse.gov/sites/defaukifilesiowb/budueri/,201 3/assersispec.Dd. See also Department of the Treasury, General
Explanations of the Administration ' Fiscal Year 2013 Revenue Proposals, at 70, _http://-wiw.tryasuvgovireso, i/rc-ccnrern tax-
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