Tax Rate Proposals Revealed

Some middle-income taxpayers will lose and some may win under new income tax rates proposed by the Obama administration. Couples with an adjusted gross income of more than $250,000, “less the standard deduction and two personal exemptions,” will see their tax rate boosted from 33% to 36%, if the new rate structure is approved by Congress. According to the administration, the new rate would apply to couples with a taxable income of more than $235,000.

Many taxpayers at that income level itemize deductions that would put them below the $235,000 threshold, allowing them to avoid the tax increase. Some may even see a tax cut, because rates on incomes between $209,000 and $230,000 would fall to 28% from 33% under the administration’s proposal. The highest current tax rate is 35%, which applies to incomes over $373,000. Under the Obama administration’s tax proposals, the highest rate would jump to 39.6%, although the income level that the rate would apply to hasn’t yet been decided.

The administration has also floated a related plan to phase out some deductions for those earning more than $250,000 to help pay for healthcare reforms. Although it has run into some serious opposition, it could make the impact of the higher tax rates on middle-income earners even worse if it is approved. If the tax-rate changes make it through Congress, they would go into effect in 2011.