President Obama's proposal to let the Bush tax cuts expire for married taxpayers making over $250,000 and single taxpayers making over $200,000 sounds simple enough. If you make under those amounts, nothing changes, and if you make more, you pay the old Clinton-era tax rates. Right?
As with anything related to the federal income tax code, things are much more complicated than they seem. For one thing, the Bush tax cuts included much more than just marginal rate reductions – they also changed the way dividend income is taxed, reduced capital gains tax rates, and phased out various limitations on exemptions and deductions for upper income taxpayers. Additionally, marginal tax rates apply to taxable income, while Obama's thresholds apply to adjusted gross income (AGI). Finally, Obama first proposed those $200,000/$250,000 thresholds back in 2009; using the same numbers four years later in 2013 would cause this tax increase to affect significantly more taxpayers than initially intended because of inflation, and the official proposal in his 2013 budget indexes those thresholds using a 2009 base year. So when Obama talks about letting the Bush tax cuts expire for families earning over $250,000 and single filers earning over $200,000, he really means $267,000 and $213,600.
The marginal rate increases are relatively simple to understand, but it requires knowing the difference between taxable income and AGI. Taxable income is simply AGI minus personal exemptions ($3,900 per dependent in 2013 plus an additional $3,900 for the head of the household) and deductions (in 2013, a minimum of $6,100 for single filers and $12,200 for married filers, plus more if the taxpayer itemizes.) So for an AGI of $267,000 (remember, that's the $250,000 threshold adjusted for inflation to 2013), the applicable taxable income threshold is $267,000 - $12,200 – (2 x $3,900): that's subtracting the standard deduction for married filers and two personal exemptions (one for each spouse.) That comes out to $247,000.
