Obama's Victory: Brace for a Bigger Tax Bill

As they say, the people have spoken, and Barack Obama will be our next president. I wish him well, and you should too, because he certainly has his work cut out for him.

Now, let’s talk about what the Obama victory could mean for your taxes. The best way to approach this subject is to go over what I think are the most important elements of Obama’s tax policy, as stated on his web site, and offer my opinions. Here goes.

The one Obama campaign pledge that I think you can take to the bank: to unwind the Bush tax cuts for the “wealthiest” Americans. Specifically, the president-elect wants to restore the top two pre-Bush federal income tax rates of 36% and 39.6%, which would replace the current 33% and 35% rates. I expect this to happen for the 2009 tax year. If you simply plug in the higher rates at the same 2009 taxable income levels that were scheduled to be taxed at 33% and 35%, you get the following results:

If the 36% rate kicks in at these levels, which I think is likely, it might appear to violate Obama’s promise to not raise taxes on married couples who make less than $250,000 or singles who make less than $200,000. However, tax bracket break points are based on taxable income which is always a good deal less than gross income. Obama could say the $250,000 and $200,000 thresholds he was talking about were based on gross income without being accused of dissembling.

What about the 39.6% rate? I think it could kick in well below the $372,950 taxable income amount shown above. While Obama has said he wants to restore the 39.6% rate, he hasn’t been specific about the threshold where it will kick in. In this case, it's best to assume the worst.

Despite Obama's promises to the contrary, recent utterances from Vice President-elect Joe Biden and New Mexico Gov. Bill Richardson, suggest that the current 28% rate bracket might be increased to 31% for 2009. If that happens, expect the 31% rate to kick in at the following taxable income levels.

In addition to pure tax rate changes, Obama also proposes to fully restore the dreaded phase-out rules that can wipe out all of your personal exemption deductions and up to 80% of most itemized deductions. These rules have been slowly vanishing in recent years, and were scheduled to completely disappear in 2010. Now, I expect them to come back with a vengeance for the 2009 tax year, beginning at the following adjusted gross income (AGI) levels.

If you think these phase-out rules are actually a disguised tax rate increase, you're correct. This is downright deceptive.

Obama promises to leave the current taxpayer-friendly federal income tax rate structure on long-term capital gains and dividends in place for everyone except those in the highest two tax brackets. For this group, the rate would increase to 20% (up from 15%). Rumblings from at least one Obama economic advisor, however, suggest that the maximum rate might go as high as 28%. Whatever shakes out, expect it to take effect for the 2009 tax year.