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Taxes for the Rich Set to Go Even Higher

Posted on June 13, 2011 | Tax Studies.

One of the major campaign promises that President Obama offered to U.S. citizens was that he would ensure equitable taxation for all so that those who earned more would pay the lion’s share of taxes. The President criticized the Bush Administration for offering tax holidays to the rich, who he felt, did not need any tax advantages (because they were financially comfortable). True to their word, the Obama Administration and the Democrats in Congress has gone a long way in ensuring that the rich will be removed of tax cuts and will bear the largest share of taxes. They have come up with several bills and proposals to have the rich taxed more:

The Three Percent Surtax Proposal

One of the more recent tax moves targeted at the rich is the 3% surtax proposal by Democratic Senate members. If passed, the surtax will be loaded onto high income earners. The Senators are seeking to introduce a bill to have a surtax charge on individuals who earn an income of $1,000,000.00 and above. The proposed tax is part of the attempts to narrow a widening tax deficit in the government.

Democrats Seeking Removal of Bush Tax Cuts

There have been talks from the Democratic politicians in the past two years to have tax cuts removed for high income earners. The Obama Administration has been keen to have the tax cuts removed, but they have compromised their stand owing to various negotiations with the Republicans. However, the removal of the Bush Tax cuts for the rich now seems to be a matter of time. The proposal is to remove the tax cuts for any taxpayer who earns more than $250,000.00 a year. Removal of the Bush tax cuts will raise the effective tax rate for the top income tax bracket by about 6.5%.

0.9% Surtax on Medicare

In 2010, Congress passed a bill to make changes on the Medicare Law. These changes were an attempt to solve the Medicare situation, whereby more retiring citizens are seeking to get free Medicare from the program. As part of the Medicare Law, Congress introduced a 0.9% Medicare Surtax for income earners in the top tax brackets. The Medicare Surtax is to be levied on all taxpayers who earn more than $200,000.00 a year and for couples who file taxes jointly who earned more than $250,000.00 annually.

Proposal to Remove Tax Ceiling on Social Security

In May 2010, President Obama mentioned that the government was seeking to make a proposal to remove the ceiling on Social Security taxes. Presently, Social Security taxes are applied to a maximum of $106,800.00 a year and any amounts above this maximum are not levied for Social Security. If the change is made to have no cap on Social Security payments, tax experts project that the move will effectively raise the taxation on the top income earners by about 10%.

Given that the top income earners are currently taxed at a top rate of 35%, with the addition of these new taxes and the aforementioned proposed tax changes, some tax analysts say that this may result in the top income earners paying an effective tax rate of over 60%.

Taxation Guidelines for Golden Parachutes

Posted on May 10, 2011 | Tax Studies.

In employment, a golden parachute is a compensation payment that is guaranteed to a key employee of an organization should the organization undergo a change of hands in ownership or control. The golden parachute is agreed upon in advanced and a legally binding contract is written out. It is part of the key employee compensation that is used to keep the best staff in an organization, especially for high positions. Such benefits are usually awarded to the very top management of various organizational institutions. The benefits could take the form of share options, bonuses, or severance pay.

There are various aspects of taxes that affect the processing of golden parachutes. For starters, the golden parachute is not a deductible expense for the corporation providing it. The IRS does not see the cost as a fair expense for corporations and therefore, the corporation will have to pay the expense after paying their taxes. For the person receiving the golden parachute, the payment is entered as regular income and subject to the normal taxation rates. Besides this taxation, the golden parachute, also referred to as the excess parachute payment, is subject to a non-deductible 20% excise tax.

However, to protect the person receiving the golden parachute from being hit by the excise tax, most corporations take up the burden of the excise tax for the employee. In other words, the corporation calculates the tax for the golden parachute agreed upon and lumps it into the payment so that the tax portion is provided for by the corporation. Naturally, the organizations are willing to take this extra step to ensure that their senior staff remains happy.

Under IRS regulations that govern the taxation of golden parachutes, these rules determine and define a golden parachute (referred to as the “excess” parachute payment by the IRS) if it meets the following guidelines:

  • The parachute payment is for the purpose of compensation
  • The benefit for the compensation accrues to a high-salaried employee, an officer of the organization, or to a shareholder of an organization within the year in which the control or ownership of the organization changed hands.
  • The benefit depends on when the ownership or control of the whole organization or of a significant part of the organization changes.
  • The benefit must have a present value that is more than 3 times what the individual entitled to the benefit earns on average for the 5 most recent tax years.

If the benefit that accrues qualifies under the above rules, the IRS requires that the applying taxation guidelines are followed. The excise tax is charged on the excess amount over the average annual pay of the individual. The IRS will also not allow a deduction for the corporation on the same applying excess amount.