Obama’s Income Tax Cliff for Senior Citizens

www.taxfoundation.org...
In researching the details on Obama's tax proposal to "eliminate" taxes on seniors making less than $50,000, I came across this rather disturbing link, which explains what would happen to seniors that make $1 more than $49,999 per year. I have cross-checked this article with the exact wording of Obama's proposal and it is completely accurate.
Seniors should look at this CARERULLY:

Barack Obama has said that he will eliminate all income taxation for senior citizens making less than $50,000 per year. Putting aside the debate on whether this is a good policy, it might be worth exploring how such a policy would be implemented. It sounds simple enough: if you're a senior and your income is less than $50,000, then you don't pay income taxes (note that the threshold is for total income, which is greater than taxable income). But what happens when your income crosses that threshold? Obama's plan does not address this question, and it turns out to be an important question.

Consider an example. A husband and wife are both seniors with a combined income of $49,500. Under Obama's plan they would pay no income taxes. But then they decide to sell their coin collection. They sell the coins for $500 and report the capital gain to the IRS. Since only those making less than $50,000 are exempt, they expect they might owe a few cents on the excess $1 of income over $49,999. But when Tax Day rolls around they are hit with a tax liability totaling a whopping $3,585. Now instead of having an income of $49,500 and owing no tax, their income is $50,000 and they owe $3,585, putting their after-tax income at $46,415. They would have been better off not earning the extra money at all.

The reason this happens is that Obama's plan, as stated in his official campaign publications, throws taxpayers directly into the 15% bracket as soon as they cross the $50,000 threshold, making them fully liable for income tax on all of their taxable income (around $29,000 for seniors after the standard deduction and personal exemptions). As seen in the above example, the extra income actually has a negative net effect; the modest $500 gain turns into a net loss of over $3,000. In this way, the policy acts as a "cliff," suddenly slamming the taxpayer with a substantial tax bill and reducing his after-tax income well below what it would have been if his income had never increased (see Figures 1 and 2).

To better understand the cliff problem it is necessary to clarify two different ways of defining tax rates. A marginal tax rate is the tax rate on the next dollar of income earned. The rates associated with the federal income tax system are marginal tax rates. Only the income that exceeds the bottom of a given tax bracket is taxed at that bracket's marginal rate. The rest is taxed at lower marginal rates.

To gauge the cliff effect, economists use a measure called the effective marginal tax rate (EMTR). The EMTR equals the change in taxes divided by the change in income between any two income levels. The EMTR only becomes distinct from the marginal tax rate when there are abrupt changes in tax liability, as in the case of the elderly couple discussed above. In that case, when their income is $49,999 their taxes equal zero, but when their income is $50,000, their taxes equal $3,585. At $49,999 the marginal tax rate is 0% because the last dollar is not being taxed, and the EMTR is 0% because there is no change in taxes up to that point. The marginal tax rate once they cross the $50,000 threshold is 15%, because the fifty-thousandth dollar by itself is taxed at 15%. However at that same point all the previous dollars become taxable at their respective marginal rates, which results in an immediate and drastic jump in taxes from zero to $3,585. The EMTR at $50,000 is then 358,500% (change in taxes / change in income: [$3,585 - $0] / [$50,000 - $49,999] = $3,585 / $1 = 358,500%). The fifty-thousandth dollar has an effective marginal tax rate of 358,500%, or $3,585. The EMTR quantifies what is intuitively obvious: that a $3,585 increase in taxes associated with a $1 increase in income is excessive and unfair.

This is very disturbing. It goes against every other income tax circumstance we have ever seen. Rather than a progressive tax rate, it is, as the article states a cliff that seniors fall off, as soon as they cross from $49,999 to $50,000. At 49,999, they pay no tax, but at $50,000 they pay $3,585.00 in taxes, if they take the standard deduction. There is no other circumstance in the ENTIRE IRS tax code where such a thing can happen. All marginal rates are usually applied to the excess over the boundaries, not the entire amount.

How could he propose such an insane plan? Either this was a great deception, or he and his advisors did not think this through. In any case, seniors should be aware of this.

That is interesting. They should just tax income over 50K. Some people might be in for a surprise.

Do you know what a senior making $49,999 in a McCain administration would pay?

I don't think this is really going to affect that many seniors. However, discounting that fact, this is absurd. It sure seems like this is an encouragement to NOT attempt to make any money and improve one's situation. Then again, that's been the result of the welfare system in this country for decades so I guess it's not that surprising.

Do you know what a senior making $49,999 in a McCain administration would pay?

To be very honest, no, I don't. However, I know that his plan does not have such a "drop off the cliff" component. I'll try to research it and get back to you. It's a good question.

reply to post by BlueTriangle

It sure seems like this is an encouragement to NOT attempt to make any money and improve one's situation. Then again, that's been the result of the welfare system in this country for decades so I guess it's not that surprising.

Your first sentence above is absolutely correct. I don't consider this welfare in the sense that we're talking about seniors that have worked all of their life, and paid taxes, and are now having a hard time making ends mee. You might say, wait, they are making $50,000, and can't make ends meet?
Here is the problem. First of all, to get the Obama tax "cut" for under $50,000, the seniors must be 65 or over.
Let's assume one is 64 and the other is 60. Neither gets any tax cut, since they have no children to claim, and no over 65 exemption. Let's further assume that the couple had one working spouse, while the other stayed home to take care of 5 or 6 children. They probably don't have much savings if they raised 5 or 6 children. Let's further assume that the 64 year old was laid off from a life-long job at a large company. Further assume that the company does not give laid off or even retired workers any health benefits. This, by the way, is now what the the MAJORITY of companies have done.
In fact, a new court ruling says:

A new federal regulation allows employers to reduce or eliminate health benefits for retirees when they turn 65 and become eligible for Medicare. Although that will cause distress for some, it is a welcome step that could help slow the deterioration of employment-based health insurance.

www.nytimes.com...
There is a huge problem here. If the employee turns 65, the can get Medicare, but the spouse being 60, now loses health benefits that had been supplied for them when the employer covered part of the health benefits(Virtually NO company pays all the costs for health care- most employes pay a portion which has been growing each year.)
That means, that if that 60 year old spouse has ANY pre-existing condition, he/she will not be able to get health insurance AT ANY COST.
If they do not, they many be able to get insurance, but it would be well over $1,000 per month.
In addition, many companies have dropped health care all together, so if both spouses are under 65, their policies would be roughly $2,000 per month for "creditable coverage", and about half that(using 2009 projections) for a high deductable plan, say $10,000 deductible, with an 80%/20% over $10,000. One hospital stay could bankrupt that couple.
This will only get worse. There is absolutely no control on health insurance rates, and they are skyrocketing at 10% to 20% per year.
Remember, your health insurance premiums are based upon age, much like life insurance, and each year, those premiums go up, exponentially as you get into your 60's.
I was just informed that our health insurance premiums are going up 45% in 2009 to over $1,500 per month, and it is a plan with fairly high co=pays.

reply to post by Incitatus

Here is what I found concerning McCain's proposals. First, there is no difference in the rates that seniors under 65 would pay under either Obama or McCain.
Over 65, seniors under 49,999 would pay nothing, but at 50,000 and above, seniors would pay 15 % of all taxable income under Obama's plan, while with McCains plan, if seniors get their income from IRA's, McCain proposes taxing seniors at only 10%, rather than Obama's 15%.
Thus, if seniors have $51,000 in total income, and after exemptions and deductions have $30,000, and are over 65, under Obama's plan they would pay $4,500 (15% of 30,000), while under McCains plan, they would pay $3,000(10% of 30,000), that is, $1,500 less under McCain's plan.
Obama's plan would have the hidden disadvantage of forcing seniors making under 50,000, NOT TO WITHDRAW ANY MONEY FROM THEIR IRA'S TO LIVE, since it would INCREASE their taxes on their ENTIRE INCOME, while under MCCain's plan, it would be an advantage to withdraw money from their IRA.
Let's see how many seniors have to learn the hard way, if Obama gets in.
Remember, after approximately $30,000 of income, social security taxes are subject to income tax. Talk about double taxation- When they contributed to social security while working those CONTRIBUTIONS had FEDERAL TAX taken out, and when they go to collect, they are now taxed AGAIN.
Now you can see wh y privatizing social security would be an advantage to seniors. Money put in a private IRA would NOT be subject to federal income tax when placed there, unlike FICA taxes now.
Most people don't understand that.

Originally posted by ProfEmeritus
Your first sentence above is absolutely correct. I don't consider this welfare in the sense that we're talking about seniors that have worked all of their life, and paid taxes, and are now having a hard time making ends mee. You might say, wait, they are making $50,000, and can't make ends meet?

You misunderstood my intent in that post. I was not intending to say that this is welfare. I was commenting that this would seem to punish those who atttempt to make extra money and better themselves and that this is also the result of the welfare system in this country.

Sorry, I misunderstood you. I'm just very concerned about this, because my wife and I are having a hard time making it with the double whammy of our health insurance costs, the worry about what to do, when I become eligible for Medicare and my wife is not, and has no insurance, and the fact that what little 403B(education equivalent of a 401K) we had 3 weeks ago, 45 % less today than it was 4 weeks ago, before the treasonous bailout bill took care of the crooks on wall street, while decimating the rest of us, who didn't do anything wrong. Fortunately, we paid for our house, and have no mortgage, because rather than living high off the hog, we put what money we had into paying off our mortgage. It also irks me that people that overextended what they could afford, are now being given the chance to get aid by both candidates, and people like us, that have struggled to pay their mortgage off, will pay for those that created their own problems.
That is socialism, and it IS, as you say, a DISINCENTIVE to try to work and get ahead. Both candidates are guilty of that.

Again, I'm sorry, I misunderstood you.

The Op has taken this subject out of context. Under Obama's plan only the income above $50,000 would be taxable, not the whole amount.

It would work just like the system today. Even someone making a million a year only pays 10% on the first $10k or so of income; 15% on the next 20k; 20% on the next 30K; 25% on the next 40K; and so on. So for Obamas plan 0% for the first 50K; and then appropriate tax rates on the balance.

reply to post by disgustedbyhumanity
Touche!

reply to post by disgustedbyhumanity


No, I am NOT taking it out of context. READ the entire link.This is the pertinent point:

The reason this happens is that Obama's plan, as stated in his official campaign publications, throws taxpayers directly into the 15% bracket as soon as they cross the $50,000 threshold, making them fully liable for income tax on all of their taxable income

The Tax Foundation is a non-partisan fact-finding organization:

About the Tax Foundation
Our Mission
The mission of the Tax Foundation is to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government. From its founding in 1937, the Tax Foundation has been grounded in the belief that the dissemination of basic information about government finance is the foundation of sound policy in a free society.

Check with the Obama policy makers. They will confirm this, if they are honest.

reply to post by disgustedbyhumanity

It would work just like the system today. Even someone making a million a year only pays 10% on the first $10k or so of income; 15% on the next 20k; 20% on the next 30K; 25% on the next 40K; and so on. So for Obamas plan 0% for the first 50K; and then appropriate tax rates on the balance.

Yes, that is the way it works for all other situations.
I know perfectly well the way the graduated tax system works, as I have filed several hundred of them over the years for myself, my corporation and my relatives.
You are making a false assumption that his proposal will be GRADUATED. IT IS NOT. READ HIS PROPOSAL CAREFULLY!
Don't Assume.
I AM TELLING YOU FOR A FACT, THAT IS NOT THE WAY HIS PROPOSAL WILL WORK.
I suspect that he just threw this out there, no one picked up on it, no one thought it through, and THAT is the PROPOSAL.

reply to post by ProfEmeritus


The 15% is only for income above $50,000. How about a bit of common sense already?

reply to post by PammyK

Read my reply. Disgusted by humanity is absolutely wrong. His explanation is the way the GRADUATED current tax system works. Obama's proposal is not for a GRADUATED situation. By the way, avoid one line posts, especially when it shows you don't know what you are talking about.

reply to post by disgustedbyhumanity

The 15% is only for income above $50,000. How about a bit of common sense already?

Wrong. CAN'T YOU READ?
Read the post. If you don't like that one, read CBSTV's post:

Tax experts across the political spectrum also fault the Obama plan's abrupt $50,000-a-year threshold. As described by the campaign, seniors making, say, $48,000 would pay no income tax, while someone with income slightly more than $50,000 could pay several thousand dollars in income taxes. Seniors nearing the $50,000 threshold would have incentive to quit working.

wcbstv.com...


Do some Research before you make statements you can't possibly support.
You continue to make false statements, as if by making them enough, they will become true.
It is YOU that have no common sense, by posting lies you cannot support.
READ, Research, THEN post!
Check out the facts before you post. You might avoid looking foolish.

I think I would rather pay a little more in taxes under Obama than continue with "trickle down" economics into the poor house with McCain.

My business can't stand anymore of the GOPs economic model that favors the big corps and sticks it to the small business man. I'm facing Chapter ll and about to lay off my remaining workers as I type this. I was hoping to sell my small business and retire but now thanks to W and his crew, that's impossible.

reply to post by whaaa

My business can't stand anymore of the GOPs economic model that favors the big corps and sticks it to the small business man. I'm facing Chapter ll and about to lay off my remaining workers as I type this. I was hoping to sell my small business and retire but now thanks to W and his crew, that's impossible.

Would you mind explaining what you mean about how the current tax favors large companies over small ones? I had a small corporation, and I saw no such disadvantage as a small business owner. Please tell me WHERE in the tax code, you are being disadvantaged?

All of this tax stuff is a scam. President cannot raise or lower taxes.

Article 1

Section 7. All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.

source


Congress will ultimately decide what the rates will be and who will get what kind of credit and tax relief. Kinda of scary when you know this tax issue falls on Pelosi laps.

Does anybody know if Pelosi and gang are reiterating the promise Obama is making about the 95% no tax increase?

reply to post by whaaa


You wouldn't have to worry about McCain tax cut. Congress is predicted to be Dem controlled so you will see a tax bill that tilts toward the Dems way of thinking. Guess it isn't more of the same after all.