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.

ByABC News
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.