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A surprise tax cut for the (almost) rich

chart_tax_difference2.top.gif By Blake Ellis, staff reporter


NEW YORK (CNNMoney.com) -- Worried about your taxes going up next year? They might for some high earners. But some not-quite-rich taxpayers could end up with a surprise tax cut.

If the Bush tax cuts expire for the nation's top earners, people making a pinch less than the wealthiest Americans, who don't quite qualify for the new top two tax brackets, could find themselves in an even lower bracket next year.

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"We should end up with a sweet spot in the middle of the higher income brackets," said Robert Kerr, senior director of government relations at the National Association of Enrolled Agents. "This is an unintended benefit of the new plan that many people don't realize."

The government is defining the wealthiest Americans as individuals with taxable income of more than $195,550, ($200,000 in adjusted gross income) and joint filers with taxable income over $237,300, ($250,000 in adjusted gross income).

These taxpayers could be hit with higher tax bills next year as the tax rates for the top two brackets return to pre-Bush administration levels of 36% from 33%, and 39.6% from 35%.

But under Obama's tax plan, the 28% income tax bracket would be widened. According to estimates from Congress's Joint Committee on Taxation, if your taxable income is between $171,850 and $195,550, you would fall into this "sweet spot" and be moved from the 33% tax bracket to the 28% bracket and could end up saving more than $1,000 a year.

Say you're a single filer with a taxable income of $195,550, taking one personal exemption and a basic standard deduction.

In 2010 you fell into the 33% tax bracket and paid $49,648 in income taxes. But if Obama's tax plan is passed, you will drop down to the 28% tax bracket and will owe $48,310, resulting in a $1,338 tax savings.

That goes for joint filers too. Those with income between $209,250 and $237,300 will also move into the 28% bracket. So joint filers making $237,300 will owe $54,399 under Obama's plan, $1,691 less than the $56,090 they owed this year.

Even if you are a high earner and get pushed into the new 36% bracket, you could still end up with a tax savings. That's because under the tax system, not all income gets taxed at the same rate. So in the case of those at the low end of the 36% bracket, only the highest layer of income would be taxed at the 36% rate, while a larger portion will be taxed at the reduced 28% rate. Net result: a lower tax bill.

This holds true until your taxable income exceeds about $240,000 -- a breakeven level at which point you would pay roughly the same in taxes in 2011 as you did in 2010, said Robert Willens, a professor of taxation at Columbia Business School and president of a tax consulting firm.

But it's a different story for the super rich.

The expiration of the Bush tax cuts could cost the wealthiest Americans anywhere from an additional few hundred dollars a year for those people in the lower end of the bracket, to hundreds of thousands of dollars a year for multi-millionaires.

"Ultimately, the inadvertent tax break would only be noticeable to a very small subset of people, since no more than 5% of people have income at or above the [current] 28% bracket," said Kerr. To top of page

 
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