Tags: Sloan | IRS | surcharge | tax

Fortune: The New Hidden Tax on the Middle Class

Thursday, 28 Feb 2013 07:45 AM

By Michael Kling

Get ready for another sneak tax attack on the middle class.

Obamacare adds a 0.9 percent surcharge on earned income over $200,000 starting and a 3.8 percent surcharge on certain investment income on single filers with adjusted gross income over $200,000 and joint filers with income over $250,000 beginning this year.

The problem is not the taxes themselves, but the fact that they are not indexed to inflation, says Allan Sloan, Fortune magazine’s senior editor-at-large.

Editor's Note: An $87,500 Tax Loophole Discovered by Cherry Hill Accountant

More and more taxpayers will be hit by the tax as incomes rise due to inflation, Sloan predicts. Over time, they will cover a good portion of the middle class.

The nonpartisan Tax Policy Center, he notes, projects that about 2.4 percent of households will pay one or both the surcharges. That figure will rise to 4.6 percent by 2022, and then to 9 percent by 2032.

In places like New York and California, the surtaxes will probably impact 20 percent or more of taxpayers.

It will be just like the alternative minimum tax, Sloan warns. That tax was enacted in 1969 to catch 155 tax avoiders with incomes over $200,000. It now covers over 3 million taxpayers. It would have covered another 30 million if Congress had not finally indexed it to inflation.

In another example of non-indexed sneaky taxes, more Social Security beneficiaries are seeing their benefits taxed, he explains. About 15 percent paid taxes on their Social Security benefits 20 years ago; now about 35 percent do.

To implement the Obamacare tax, the IRS recently released new rules for investment income, including income from stocks, bonds, commodity securities and specialized derivatives.

The rules lay out when the tax applies to trusts and annuities, as well as to individual securities traders, Reuters reported.

But the new rules leave some questions unanswered, tax experts said. For instance, it was not clear how rental income will be treated, Michael Grace, managing director at the law firm Milbank, Tweed, Hadley & McCloy LLP, told Reuters.

“The proposed regulations surely will increase tax compliance burdens for individuals,” said Grace, a former IRS official. “There’s clearly some drafting left to be done.”

Editor's Note: An $87,500 Tax Loophole Discovered by Cherry Hill Accountant

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