“How would you feel if you had a six-figure tax bill?” a question posed at a meeting of tax professionals recently. Many in attendance responded with an overall negative point-of-view that is until the point was made that you’d need to have a high income to rack-up six-figures in taxes owed. Then the responses changed, “Well sure, I’d love to have the level of income required for me to have to pay six-figures in tax.”
What exactly is the amount of income required to have a six-figure tax bill? In the simplest terms, for a married couple, if their taxable income is approximately $378,000, their tax bill should be slightly over $100,000. But this is the US Tax Code we are talking about, so $378K isn’t exactly the answer; because of phase outs. @HeinkelTaxLaw
For the purposes of this post, an IRS Phase Out is the gradual reduction of a tax credit, or income offset, as a taxpayer approaches the income limit to qualify for that credit or offset. As well as the gradual reduction of a taxpayer’s eligibility to contribute to a tax-advantaged retirement account as the taxpayer approaches an income limit.
Some phase outs begin (Married Filing Joint) as low as income levels of $98,000, with just about all of the phase outs ‘kicking in’ around $311,000. What this means is that depending on numerous variables, a married couple could easily face a six-figure tax bill at income levels significantly below $378,000.
Many phase outs create significant marriage penalties—or bonuses—because the phase out range for married couples is less than twice that for single tax filers. For example, the phase out of personal exemptions begins at $311,000 for married couples filing jointly, less than twice the $259,000 threshold for single filers. Consider a couple in which each spouse has income of $200,000. The phase out would not affect either spouse if they were not married—each would have income under the single threshold—but as joint filers they lose 74 percent of their combined $8,000 personal exemptions, increasing their taxable income by nearly $6,000.
Phase outs can also create marriage bonuses, reducing a couple’s combined tax bill. For example, if one spouse has $300,000 of income and the other spouse has none; their combined income would be under the $309,900 threshold for reducing exemptions for joint filers. If they were single, the high-earning spouse would lose 34 percent of her personal exemption, which would increase her taxable income by $1,360.
Phase outs affect many beneficial items on a tax return. Itemized Deductions, personal exemptions, education credits, retirement contributions, earned income credits, child tax credits; the list is extensive. (#EnrolledAgent)
If you have questions about whether you exceed income thresholds subjecting you to phase outs, call us for help. Contact the Florida offices of the www.taxproblemsolver.com today to speak with an IRS Enrolled Agent (EA), tax resolution attorney or CPA. Call 407-629-5923 or 727-894-2099. Or email us at steve@TaxProblemSolver.com. We help taxpayers NATIONWIDE and are here to provide quality assistance to your most important tax issues.