Super-rich would be taxed most under Obama plan

The wealthiest stand to lose the most under President Obama's proposed budget, while individuals with lower incomes could gain in many different ways.

Many of those in between — those with household incomes of $200,000 to $400,000 or so — may not see as much of a difference in their tax bills as feared.

These people live in high-cost areas of the Northeast and California and stretched, rightly or wrongly, to afford their homes when real-estate prices were higher. They don't consider themselves rich, but they've been worried as the president has persistently defined them as rich enough to pay more, at the exact moment their jobs may be in danger or their small businesses or commission income may be suffering.

It turns out that many of these people were already subject to pretty high taxes because they were paying the alternative minimum tax, or AMT. Even if the new tax increases go into effect, the amount of taxes they owe will not change much, said Clint Stretch, the managing principal of tax policy at Deloitte in Washington, D.C.

That's because the amount they owe under the regular income-tax system, while higher under Obama's plan, may not be enough to push them out of AMT territory, he said.

Higher-income people in states with lower income taxes or lower property taxes are more likely to pay more under the president's proposals, depending on exact income and mix of deductions.

Obama's tax plan will affect anyone — mostly the very rich — who works for a hedge fund or private equity firm and pays only a 15 percent capital-gains tax rate on much of the money brought home. Such people would pay ordinary income-tax rates, up to 39.6 percent, on everything.

None of this would start until 2011, which gives the economy time to recover.

Meanwhile, the budget proposal contains new or improved tax breaks for low-income workers, college students and millions of people who earn less than $65,000 and want to save more money for retirement. Besides taxes, there are a number of education and health programs in the new budget that will benefit people with low and moderate incomes.

Not all of these proposals will survive the congressional haggling that comes next.

But it sure looks as if some wealthy people will pay more. Whether it's more than their fair share is a debate for the ages. A look at how the changes will affect the affluent:

• The top two federal income-tax brackets would rise to 36 percent and 39.6 percent from 33 percent and 35 percent, respectively. This would affect married couples who earn more than $250,000 in gross income, and singles who earn more than $200,000, according to Stretch of Deloitte.

• Upper-income people also will find that their income-tax deductions are not worth as much. Most families in the top two tax brackets itemize their tax deductions instead of taking the standard deduction. Mortgage interest, property taxes, charitable contributions and state income taxes are some of the most popular deductions.

Under the proposed budget, however, taxpayers will get less in deductions. Currently, the benefit of itemizing increases as you move up the income ladder. For someone in the existing 35 percent tax bracket, $10,000 in itemized deductions would reduce the tax bill by $3,500. The Obama plan would limit that deduction to 28 percent, cutting tax liability by $2,800.

Under Obama's budget proposal, a typical family of four making $300,000 a year would see its federal income taxes increase by $1,100, while a similar family making $500,000 would get an $11,300 increase, according to the Deloitte analysis. Single filers with no children would be pay even more.

The analysis took into account typical deductions for families with high incomes, Stretch said.

• People in the top two brackets will also pay more in taxes on their investments. The rate paid on capital gains and qualified dividends will rise to 20 percent from 15 percent. Middle-income families, or those in the 25 percent and 28 percent tax brackets, will still pay 15 percent.

The budget would make permanent the "Making Work Pay" tax cut, which was passed as part of the Recovery Act for 2009 and 2010. This provision provides a refundable tax credit of up to $400 for working individuals and $800 for married couples filing jointly.

The credit begins to phase out at $75,000 for individuals and $150,000 for married couples filing jointly.

Since the credit is "refundable," you'll get money back even if you have no federal income-tax liability. The credit will be distributed by reducing the amount of taxes deducted from your paycheck.

Material from The Associated Press is included in this report.