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Posted by on May 23, 2008, 11:05 am
Financial Advisor
http://fa-mag.com/news.php?id_content=4&idNews=1400
Obama Social Security Talk Spurs Tax Plans
May 23, 2008
Wealthy folks worried that a new administration will raise their
taxes sharply by tinkering with Social Security are making plans now
to soften the blow.
Campaign trail talk by Democratic Sen. Barack Obama, D.-Ill.,
about shoring up Social Security with a tax on higher incomes has
advisors walking clients through ways to reduce the impact. Rich self-
employed people would be hardest hit.
Among the possible antidotes: Taking a bonus or exercising stock
options this year instead of next. Another idea is for entrepreneurs
to take smaller salaries to reduce their taxable income.
Tax rhetoric by politicians is powerful stuff, as recent activity
among planners proves. The election is months away; nonetheless,
Social Security talk is one of several campaign tax issues driving a
very real effort by advisors to buffer clients now from what they see
as looming rate hikes. Many are convinced Democrats will raise rates
on capital gains and ordinary income.
"We're seeing clients worried about the possible repeal of wage
caps on Social Security," said M. Holly Isdale, managing director and
head of wealth advisory services at Lehman Brothers Holdings Inc. "My
experience is that they are beginning discussions to accelerate income
into this year and thus avoid an increased Social Security tax, with
the idea to pull the trigger on these plans later in the year."
Isdale has been "deferring the details to clients' accountants who
have a more detailed view of the entire income tax picture," she
added.
Under current law, people only pay Social Security tax on the first
$102,000 of their income in 2008. (The tax, a part of the payroll tax
system, is used to fund Social Security and is separate from a
Medicare tax.) Nothing more than that is taxed, so a big share of high-
income folks' wages isn't subject to the levy. What has people
worried, according to Joan Crain, senior director of wealth management
strategies at BNY Mellon Management, is the idea that Obama might
change the rules to tax all income.
There are also concerns that Obama, if elected, might create a so-
called "donut," that would tax the first $102,000 and everything over
a higher amount, say $200,000, according to Crain. The idea of the
donut is that the system would create a hole that would spare upper-
middle-class people some of the tax.
"Clients are concerned and annoyed," Crain said. "They're saying
that it's another stealth tax increase."
The tax rate for affected wages paid in 2008 is set by statute at
6.2% for both employees and employers. So an individual with wages
equal to or more than $102,000 would pay $6,324 in tax, and his or her
employer would contribute the same amount. An individual who earns $1
million would pay the same amount of tax.
The self-employed get a double-whammy; they must contribute for
themselves and the business. So, an entrepreneur with $102,000 of
income subject to the Social Security would owe $12,648 in tax.
Doctors, lawyers and hedge fund partners with substantial self-
employment income are among the individuals who fall into this
category.
"It's real, but it's hidden," said Isdale. "People may say 'You're
saber-rattling' but I think it's worth noting and laying out for
people what taxes could look like."
Obama's campaign didn't respond to a request for comment. His Web
site, www.barackobama.com, says the candidate believes the first place
to look for ways to strengthen Social Security is the payroll tax
system.
"Currently, the Social Security payroll tax applies to only the
first $102,000 a worker makes," the Web site says. "Obama supports
increasing the maximum amount of earnings covered by Social Security
and he will work with Congress and the American people to choose a
payroll tax reform package that will keep Social Security solvent for
at least the next half century."
<rest at site>
On top of this, Obama wants to roll back the Bush income tax cuts.
High earners will be facing federal marginal income tax rates above
50%.
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Posted by Elle on May 23, 2008, 1:15 pm
> Financial Advisor
> http://fa-mag.com/news.php?id_content=4&idNews=1400
>
> Obama Social Security Talk Spurs Tax Plans
> May 23, 2008
snip for brevity
> "It's real, but it's hidden," said Isdale. "People may
> say 'You're
> saber-rattling'
The reason it is saber rattling is because only about half
the facts are presented. E.g. (1) Only about 18% of
households make over $100k a year. (2) If these are
two-income households, then chances are no one in the
household will be hit with the proposed extra SS tax. (3)
Fewer than 5% of households make incomes over $200k, and
again, with two-income households, each earner most likely
lands in the proposed donut.
Nor do the authors propose a realistic solution to the SS
budget crisis. We do need a solution, right?
> but I think it's worth noting and laying out for
> people what taxes could look like."
Well sure. Unless someone wants to take the "planning" out
of FP.
>From some other source--
> On top of this, Obama wants to roll back the Bush income
> tax cuts.
> High earners will be facing federal marginal income tax
> rates above
> 50%.
The current top effective marginal rate is about 38%. It's
the extra 12% (for those self-employed) from the proposed SS
tax changes that gets it up to 50%. See
http://online.wsj.com/article/SB120528180300228815.html?mod=opinion_main_commentaries
IOW, with the donut, less than 5% of taxpayers are likely to
see this rate increase. Probably far less than 5%. And, oh
my gosh, it may fix the Social Security budget crisis.
Obama's a problem solver! Can anyone believe this? <end
sarcasm>
Disclaimer: I did not vote for Mr. Obama. The guy's
proposals deserve to be judged fairly, though, if only to
educate people on micro- and macro-financial planning.
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Posted by rick++ on May 23, 2008, 4:30 pm
> The reason it is saber rattling is because only about half
> the facts are presented. E.g. (1) Only about 18% of
> households make over $100k a year. (2) If these are
> two-income households, then chances are no one in the
> household will be hit with the proposed extra SS tax. (3)
> Fewer than 5% of households make incomes over $200k, and
> again, with two-income households, each earner most likely
> lands in the proposed donut.
A minor elaboration - theres an exact answer to this specualtion.
In any given year the SS cuttoff is set to 90% percential of national
earned income, so 10% of individual taxpayers will be affected by
Obama's change. Obama has huge support in this 10% so
he's got to handle it "fairly".
I always thought this was the most accurate way of defining
the boundary between middle class and upper middle class,
beacuse the census and DOL data tend to lag a few years
behind social security data.
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Posted by Elle on May 23, 2008, 9:54 pm
> In any given year the SS cuttoff is set to 90% percential
> of national
> earned income,
http://www.ssa.gov/OACT/COLA/cbbdet.html says the cutoff
each year is:
($60,600, the cutoff in 1994) * (average wage for two years
ago)/(average wage for 1992)
The wages referenced are per individual, not per household.
>From the two bottom income tables linked at
http://pubdb3.census.gov/macro/032007/perinc/toc.htm,
worst case I am figuring the Obama plan sans donut will
affect around 5% of wage earners. With the donut, it appears
under 2% will be affected.
Thanks, Rick, for elaborating in your other post on how you
see your personal taxes potentially changing.
kastnna, sure. But the "don't bite the hand that feeds you"
guide goes both ways: Workers need executives and vice
versa. The repercussions from workers could be just as
severe as those from executives. Workers haven't the bucks
but they do constitute many more bodies.
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
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Posted by Gil Faver on May 25, 2008, 12:05 pm
> The reason it is saber rattling is because only about half the facts are
> presented. E.g. (1) Only about 18% of households make over $100k a year.
> (2) If these are two-income households, then chances are no one in the
> household will be hit with the proposed extra SS tax. (3) Fewer than 5% of
> households make incomes over $200k, and again, with two-income households,
> each earner most likely lands in the proposed donut.
>
> Nor do the authors propose a realistic solution to the SS budget crisis.
> We do need a solution, right?
>
> The current top effective marginal rate is about 38%. It's the extra 12%
> (for those self-employed) from the proposed SS tax changes that gets it up
> to 50%. See
>
http://online.wsj.com/article/SB120528180300228815.html?mod=opinion_main_commentaries
> IOW, with the donut, less than 5% of taxpayers are likely to see this rate
> increase. Probably far less than 5%. And, oh my gosh, it may fix the
> Social Security budget crisis. Obama's a problem solver! Can anyone
> believe this? <end sarcasm>
making 5% of the taxpayers, who are already footing the vast majority of the
tax bills, "solve" the problem of the other 95% is not my idea of a
solution.
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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