Upper-Income Taxpayers Look for Ways to Sidestep Obama Tax-Hike Plan

Obama's new tax plan has some wondering how they can avoid paying higher taxes.

February 27, 2009, 4:00 PM

March 2, 2009 — -- Editor's Note: Yesterday ABC News published a version of this story which some readers felt did not provide a comprehensive enough analysis of Obama's tax code for those families making $250k or more. ABCNews.com has heard those concerns and after review has decided to post an updated version of the story below.

President Barack Obama's tax proposal -- which promises to increase taxes for those families with incomes of $250,000 or more -- has some Americans brainstorming ways to decrease their pay in an attempt to avoid paying higher taxes on every dollar they earn over the quarter million dollar mark.

A 63-year-old attorney based in Lafayette, La., who asked not to be named, told ABCNews.com that she plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law.

"We are going to try to figure out how to make our income $249,999.00," she said.

"We have to find a way out where we can make just what we need to just under the line so we can benefit from Obama's tax plan," she added. "Why kill yourself working if you're going to give it all away to people who aren't working as hard?"

But Gary Schatsky, a financial advisor and the president of NY-based Objectiveadvice.com, said that reducing your income won't help a great deal because of the way the country's tax system is set up.

"Just going over $250,000 doesn't mean it impacts your tax liability for every dollar before that," said Schatsky, "It impacts you at the margin."

Marginal or graduated tax systems like the one in the U.S. means only the money earned over a certain amount -- $250,000 in the case of Obama's proposal -- will be taxed at an increased percentage.

For instance, for a person earning $350,00, the first $250,000 of income would be taxed at lower tax rates, while the last $100,000 would be taxed at Obama's higher rate.

"Only the incremental earnings above [a quarter of a million dollars] are taxed at a higher rate," said Schatsky.

"[T]o focus keeping your income below a quarter million dollars is not going to have any spectacular magic for individual tax payers," said Schatsky. "The difference between $249,999 and $251,000 will probably have zero tax impact."

Schatsky adds that he is not aware of very many people who would rather take a pay cut than pay taxes on the income that falls into a bracket that is taxed more.

"The last time I offered someone $500,000 of additional income there was very little instance of people saying ' no thank you,'" he said.

Obama's budget proposal calls for $989 billion in new taxes over the next 10 years, most of which will be earned from increased taxes on individuals who make more than $200,000 and from families who make more than $250,000.

The expiration of the Bush administration's tax cuts at the end of 2010 would garner an estimated $338 billion, $179 billion would come from reducing the size of some itemized deductions, such as mortgage interest and charitible donations, for higher-income taxpayers and $118 billion would be brought in from a hike in the capital gains tax. The remaining $353 billion would come from taxes on businesses.

So far, Obama's tax plan is being looked at skeptically by both Democrats and Republicans and therefore may not pass at all.

Dr. Sharon Poczatek, who runs her own dental practice in Boulder, Colo., said that she too is trying to figure out ways to get out of paying the taxes proposed in Obama's plan.

"I've put thought into how to get under $250,000," said Poczatek. "It would mean working fewer days which means having fewer employees, seeing fewer patients and taking time off."

"Generally it means being less productive," she said.

Poczatek argued that by reducing her income from her current $320,000 to under $250,000 by having her dental hygienist work fewer days and byl treating fewer patients, she would avoid paying higher taxes on the $70,000 that would be subject to increased taxation if Obama's proposal is signed into law.

Additionally, any interest from a checking or savings account or capital gains from stocks, would also count as taxable income.

"The motivation for a lot of people like me -- dentists, entrepreneurs, lawyers -- is that the more you work the more money you make," said Poczatek. "But if I'm going to be working just to give it back to the government -- it's de-motivating and demoralizing."

Can Obama's Tax Plan Be Gamed?

Schatsky did say that there are several commonly used techniques tax payers use to fall into a particular tax bracket.

"It's very possible that there are plenty of things you can do with general tax planning techniques – attempting to recognize loses, pushing gains to years when your income is lower and increasing retirement plan contributions – to come below $250,000," said Schatsky.

"But Obama's proposal has yet to be hammered out and the devil is in the details," he added.

So far, Obama's proposal does outline new limits on tax deducations for families earning more than $250,000, including those on charitable donations, mortgage interest and state and local taxes.

Additionally, Obama said that the elimination of tax cuts for the wealthiest Americans will benefit 95 percent of working families.

Because we have a marginal tax system, said Schatsky, what Obama's plan means is that the amount of tax you pay on each incremental dollar is higher only when your income is pushed into a higher tax bracket.

Schatsky said that the incentive to get under $250,000 may be more so if the tax plan outlines that an individual who goes over a prescribed limit would face a reduced value of their itemized deductions.

"If the value of all your itemized deductions goes from a 33 percent level to a 28 percent level than there would be a reason for people to do dramatic things to reduce their incomes," said Schatsky.

Peter Morici, a professor of business at The Robert H. Smith School of Business at the University of Maryland, agrees that while it may be possible to sneak around the taxes, it won't be as simple as some may think.

"You have to be pretty close to $250,000 in terms of your income to get underneath it," said Morici.

Does Obama Tax Plan Promote Class Warfare?

Morici says that he believes Obama's tax proposal could spark a kind of class war. "What Obama is doing is pitting the poor against the upper middle class," said Morici. "He'll tax the rich for the health benefits everyone else wants."

Obama has said the new taxes on those making over $250,000 would go toward a fund that would support a gradual move to universal health care coverage.

Supporters of Obama's budget plans say that those who are at the top and complaining need to look at the bigger picture.

"Those who are going to be taxed more are obviously going to complain but I think they may miss the point," said Lisa Rotenstein, the chair of the Harvard Healthcare Policy Group at the Institute of Politics.

"This could have broader implications for the American economy as a whole improved health care means a healthier workforce that is more productive," said Rotenstein.

But Colorado dentist Poczatek says those who support the increase in taxes misunderstand what it means for those who will end up paying more.

"I'd like these people to know that we pay a lot of taxes, and have been paying a lot of taxes through the past administration," said Pcozatek.

"We make a lot of money, it's true, but we also already pay a lot of taxes," she said.

"So maybe we got a little bit successful but we worked very hard," she said. "It's taken us over 30 years and it didn't happen overnight. Every day is a lot of work.

"We're working for it and we're still overtaxed."

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