Regular readers in this forum know the value of pursuing tax reform that limits disincentives to work, save, and invest. An article in the latest Forbes titled “Tax Bracket Magic” offers a good example of how the complications of our existing federal tax code can create problems.
Warning to high achievers: The tax code is studded with phaseouts, income limits and bracket creep that punish people who cross certain boundaries. The good news is that there are ways to dodge these problems, the chief one being clever handling of your retirement accounts.
Cutoff points can come anywhere on the income scale but are particularly troublesome for families whose income falls between $100,000 and $300,000. If your adjusted gross income is too high the government could snatch away your tax benefits for college costs, chop down your exemptions, surcharge your annual Medicare bill $6,869, haircut your itemized deductions, deny you a protective shield against the alternative minimum tax or subject your dividends and capital gains to a 3.8% surtax.
The penalties for success are getting worse. Three arrive next January, including that 3.8% surtax on investment income.
Imagine how much more productive people could be if they didn’t have to think about these issues and instead could devote more time and resources to making the best possible products or offering the best possible services to consumers.