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Gann Partnership, LLC

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Economic Update by Greg Gann


Taxes Now and Taxes January 1, 2011

(Unless Congress extends the Bush Tax Cuts)

Most people are aware that the Bush tax cuts enacted in 2001 expire as a matter of law at the end of the present calendar year. President Obama identifies any individual earning $250,000 per year as "rich". I wanted to know what the impact of these scheduled tax increases would be for a wage earner whose income is $250,000. To help in this analysis, I turned to Tracey Peters, CPA, whose firm Tracey S. Peters, CPA, LLC is located in Ellicott City, Maryland. Tracey provided these charts.

Example #1: Single taxpayer with no dependents. The taxpayer has a mortgage of $200,000 and pays $12,000/year in mortgage interest. Real estate taxes are $6,000. State taxes paid are $18,000.

Single: Individual: No Dependents

Tax Items

2010

2011

(all Bush tax cuts expire)

Changes

Difference

Wages

$250,000

$250,000

0

Interest

$2,000

$2,000

0

Qualified Dividends

$4,000

$4,000

0

Capital Gains

$3,000

$3,000

0

AGI

$259,000

$259,000

0

Itemized Deductions

$43,000

$42,078

Phase-outs return

$922

Subtract

$216,000

$216,922

Exemptions

$3,650

$2,828

Phase-outs return

$822

Taxable Income

$212,350

$214,094

Increase in taxable income

$1,744

Tax

$54,639

$61,339

Increase from 33% tax bracket to the 36% tax bracket

$6,700

Alt Min Tax

$4,5001

$8,0001

Alt min tax returns

$3,500

Total Tax =

$59,139

$69,339

Overall Tax Increase =

$10,200

1 using 2009 rates

Example #2: Married couple filing jointly with 2 dependents over the age of 17 years. The taxpayers have a mortgage of $200,000 and pays $12,000/year in mortgage interest. Real estate taxes are $6,000. State taxes paid are $18,500.

MFJ: 2 Dependents Over 17 Years of Age

Tax Items

2010

2011

(all Bush tax cuts expire)

Changes

Diff

Wages

$250,000

$250,000

0

Interest

$2,000

$2,000

0

Qualified Dividends

$4,000

$4,000

0

Capital Gains

$3,000

$3,000

0

AGI

$259,000

$259,000

0

Itemized Deductions

$43,500

$42,578

Phase-outs return

$922

Subtract

$212,500

$216,422

Exemptions

$14,600

$11,312

Phase-outs return

$3,288

Taxable Income

$200,900

$205,110

Increase in taxable income

$4,210

Tax

$43,586

$51,938

Increase from 28% tax bracket to the 31% tax bracket

$8,352

Alt Min Tax

$5,7001

$13,0001

Alt min tax returns

$7,300

Total Tax =

49,286

$64,938

Overall Tax Increase =

$15,652

1 using 2009 rates

A family with two children in college, has to assume an outlay of $50,000 per year, and that is for a public university. It would literally be double for a private university. So, in the second example, assuming public university tuition expenses of $50,000 and a federal tax liability of $64,938, State taxes of $18,500 and real estate taxes of $6000, out of the gross earnings of $250,000, only $110,562 remains after deducting just these line items. If the children attended private university, there would remain only $60,562 per year or approximately $5000 per month to cover housing and mortgage expenses, automobile, insurance, etc, etc, etc. None of these calculations include any savings for retirement. President Obama may have concluded that these wage earners are rich, but I doubt too many of these individuals feel that way. And, if they are self employed, the tax costs are even greater. Income of $250,000 is much richer for a public employee with top health benefits and retirement pension security than for an independent private sector employee or business owner.

Respectfully submitted,

Greg Gann

Questions can be relayed to me or directly to Tracey Peters at (410) 418-9111 or

tpeters@tpeterscpa.com;

Tracey Peters is not affiliated with or endorsed by LPL Financial.

The opinoions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.


This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Gregory E. Gann, Esq.
Gann Partnership, LLC
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