Tuesday, July 22, 2008

A reader sent this to me- it is a quick read and relates a conversation between Ralph and Jim (both retired) about federal taxes. Thanks to Tim Burns for sending it to me.- Steve

JIM....Ralph, there is a national election coming in November of this year, of which the outcome will greatly affect our tax liabilities. Did you know that?

RALPH....No Jim, I did not. In fact, I read an article recently in the U.S. News & World Report magazine by the Editor-in-Chief, Mortimer B. Zuckerman. In the article, he indicated that the middle-tier households earn between 45,000 and 90,000 dollars annually. This is the first time that I have heard a dollar figure for the middle income category for household earnings (husband and wife). Strangely, the political consultants on TV never say who the middle income earners are. They seem to only speak in generalities. My point is that I know that you and I both fall in that income bracket, and that the two political candidates running for President of the United States say that they will not raise taxes on the middle income earners if they are elected to office.

JIM....Well Ralph, I’ve got news for you. One of the candidates (the democrat) has said that he will let the Bush tax changes of 2001 and 2003 lapse on December 31, 2010, if he is elected to office. (This is called a sunset law in which a date is set for the law to be cancelled at the time that the law is written).

RALPH....But Jim, what has that got to do with us? We are just the little people (the low wage earners, and retired folks living on Social Security plus some investment income from savings over the years). The politicians all say that “we” are the ones they are looking after.

JIM....Now, listen carefully Ralph! I’m going to give you a run-down on the tax categories that affect the little people like us, not the upper income earners.
1. To arrive at your taxable income, you must first add up all your sources of income (social security, dividends from stock investments, interest from CDs, etc.) that make up your retirement income. This is called the Adjusted Gross Income or ( AGI ). Then, you must subtract the standard or itemized deductions and the personal exemptions for you and your wife. This will result in the bottom line, which is your Taxable Income. ( By the way, these deductions will be in the range of 16,000 to 18,000 dollars for a married-filling-jointly couple, who are over/under the age of 65.
2. Now this is where it gets interesting! Before 2001 and the Bush tax cuts, the starting tax rate was 15% on taxable income up to $45,200 ($27,050 for individuals), above which the tax rate leaped up to 28%.
But, the Bush tax changes introduced a 10% rate for the first time ever. In the first year, the first $12,000 ($6,000 for individuals) was taxed at 10%, and then taxed at 15% up to $46,700 ($27,950 for individuals). Now, over the past seven years, all tax categories have been adjusted and indexed each year for inflation, and for this year, 2008, the first $16,050 ($8,025 for individuals) will only be taxed at 10%, and at 15% from $16,050 up to $65,100 ($32,550 for individuals).
3. The other tax categories currently are 25%, 28%, 33%, and 35%, but I am only talking about the low income and low-middle income folks like us, in this conversation.
Also, there is one other tax break that we were given to assist our retirement income, and to encourage investments in our economy. The capital gains tax rate was reduced from 20% to 15%. But, even better, GET THIS, if you are in the 10% or 15% tax brackets and you own certain corporate stocks that pay dividends, you will be taxed only 5% on that dividend income. (Referred to as qualified dividends by the IRS).

RALPH....Wow! I have been turning my income records over to an AARP tax preparer, each year, and did not know that I was getting that much of a break on my taxes courtesy of Bush and the Republican Congress back in 2001 and 2003.

JIM....You know Ralph, if these tax laws are allowed to lapse on December 31, 2010, the tax laws now in effect will revert to the numbers prior to 2001, therefore, the 10% rate will return to 15% (a 50% increase); the 15% rate on the difference between $65,100 and $45,200 (using this years numbers compared to 2001) will return to 28% (an 86% increase); and the 5% rate will return to 15% or 28% depending upon whether or not you are still in the 15% bracket (a 300% or 560% increase because dividends will then be taxed as ordinary income).
And, what really chaffs me is that the talking heads on TV only talk about the big break that the “RICH” are getting (which is the difference between the previous 39.6% rate and the current 35% rate, which was a reduction of only 11.6%).

RALPH....This all sounds like a lot of extra money will be coming out of my pocket, and out of my grandson’s pocket if that democrat gets elected. My grandson is a low income wage earner, because he is working at any job he can get during the year part time to help pay for college expenses.

JIM....That’s right Ralph. Large amounts of money will be taken from us little people, and it will be used to support bigger and bigger government, filled with high payed bureaucrats, at our expense.
As an example, I made a calculation for a household with a taxable income of 58,000 dollars this year. That income would fall into the low end of the middle-tier household earnings that Mr. Zuckerman wrote about. I calculated that the tax would INCREASE by 3,366 dollars over and above what it would normally be for this year, if the tax code were to return to pre 2001. That income would include a mix of income sources, including some qualified dividends.

RALPH.... I’m going to take the last word in this conversation, and say WOW! again! It appears to me that a vote for the democrat candidate in November 2008 will be a vote against OUR own best interest, and against the best interest of ALL our friends and neighbors who have low income, or are middle-tier income households.

This conversation took place in July 2008.

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