We summarize how tax rates will increase if all of the tax proposals get enacted. It is not a pretty picture unless you want to give the government 70% of your inco...
We know that various tax proposals are bouncing around Congress and the Administration. We thought it might be helpful to determine what a farmer’s maximum tax bracket might look like if all of “bad” laws get passed.
Most farmers assume that these rates would only hit you if your income exceeds $1 million. The reality is that all of the rates that we will summarize below will start applying to married couples earning over $400,000 (other than the top state rate). It does not take much to have net income over $400,000 for even a medium sized farm operation and this is especially true in retirement.
Here is a summary of the rates:
- 39.6% – Top marginal tax rate (up from current 37% and no Section 199A deduction allowed), plus
- 1.2% – Pease limit on itemized deductions (3% phase-out of itemized deductions), plus
- 12.4% – Social Security tax on earned income over $400,000. Currently this tax expires once your earned income hits $142,800, plus
- 2.9% – Medicare Tax rate on all earned income, plus
- .9% – Extra Medicare Tax once earned income goes over $200,000 or $250,000 for married couples, plus
- 13.3% – Maximum California income tax rate.
If we add up all of these tax rates, your combined federal, state and payroll tax rate would be 70.3%.
Many farmers do not live in California, but the top Iowa tax rate is 8.53% which drops your top rate to about 65%.
Now this assumes that the top rate will remain at 39.6%. There is already chatter that the top rate will exceed this amount if your income is at least $1 million.
How does this compare to the current income tax situation. Let’s review those rates:
- 37% – Top marginal tax rate, minus
- 7.4% – The benefit of the Section 199A deduction, plus
- 2.9% – Medicare Tax rate, plus
- .9% – Additional Medicare Tax rate, plus
- 13.3% – Top California income tax rate.
This equals a total combined tax rate of 46.7%. The increases in top marginal rates is almost exactly 50% (50.535% to be exact).
I don’t know about you but anytime taxes start to exceed 70% I am not sure what the incentive is for farmers and other entrepreneurs to work harder when you only get to keep 30%.
We will keep you posted.