Take a look at the 2006 tax tables and you'll see that the top federal tax bracket is currently 35%. So that would suggest that the maximum marginal tax rate is 35%, right? Thanks to the "stealth tax", the top tax rate is often higher than that.
Have you been hit by the stealth tax? If your income exceeds $145k, the answer is probably "yes".
The government was very sneaky when they enacted this tax. If your adjusted gross income (AGI) exceeds $145,950 in 2005, you begin to lose out on the tax savings associated with your itemized deductions and your personal exemptions as follows:
Minimize the Stealth Tax
Reducing your Adjusted Gross Income (AGI) is the only way to reduce the impact of the stealth tax. Start by maxing out your 403(b) or 401(k) plan at work which reduces your taxable earnings. Taking advantage of other pre-tax benefits through your employer's Flexible Spending Accounts is another way to reduce your AGI. Most employers allow you to pay your healthcare costs and dependent care expenses with pre-tax dollars.
Are you self-employed? If so, contributing to a SEP/IRA, SIMPLE IRA, or Solo 401(k) reduces the impact of this tax. Claiming your professional expenses directly against your self-employment income on the Schedule C, instead of as a miscellaneous itemized deduction, reduces your AGI as well.
If you have a sizeable investment portfolio outside of your tax-deferred accounts, consider switching to tax-efficient mutual funds and tax-exempt bonds or bond funds. By reducing your taxable investment earnings, you'll reduce your AGI.
No Stealth Tax With AMT
Anyone subject to the Alternative Minimum Tax (AMT) is not subject to the stealth tax. That's because you get to add back the itemized deduction phase-out and don't get to include your personal exemptions when calculating the AMT.
Remember, each year, everyone needs to calculate their taxes two ways - the regular way, and then using the AMT rules. You are required to pay whichever tax is higher. We addressed the Ubiquitous AMT in our April, 2005 Newsletter.
Relief is Finally Here
The limitation on itemized deductions and the phase-out of the personal exemptions for higher-income taxpayers will be gradually repealed beginning in 2006, and will be fully repealed in 2010. Then, on January 1, 2011, the 2001 Tax Act that eliminated the stealth tax sunsets and the tax laws revert to the pre-2006 rules once again. So when it's all said and done, you have a one-year reprieve from the stealth tax.
Does this sound familiar? “You've been pre-approved for a new credit card with a $10,000 limit.” These solicitations are called 'firm offers of credit' and are based on your actual credit report. Under the Fair Credit Reporting Act (FCRA), the Consumer Credit Reporting Companies (Equifax, Experian, Innovis and TransUnion), are permitted to include your name on lists used by creditors or insurers to make firm offers of credit or insurance. If you meet certain criteria, it may result in pre-approved offers of credit or even insurance. With your authorization to confirm some additional information, you may receive these credit or insurance offers.
Prescreened offers can be helpful in providing you with information about product availability and pricing that are closely tailored to your financial experiences and needs. This information can help you make better financial decisions. However, these solicitations can become lost or stolen and potentially lead to fraudulent activity that could damage your credit rating or result in out-of-pocket losses. Many people simply consider these solicitations more unwanted junk mail.
If you're like me, you receive several of these offers every week. But what if you don't want to receive these offers or are concerned that these offers might fall into the wrong fraudulent hands? Fortunately, the government was actually looking out for you in 2003. The FCRA gives you the right to "Opt-Out", which prevents consumer credit reporting companies from providing your credit file information for firm offers of credit or insurance that are not initiated by you. You can request to "opt out" of these offers at www.optoutprescreen.com or by phone at 1-888-567-8688.
Please note that opting out does not prevent companies authorized by you to look at your credit information from receiving the information they need. For example, if you've authorized a bank to check your credit while applying for a mortgage, the fact that you opted out from receiving prescreened offers will not prevent the bank from getting the information they need.
National Do Not Call Registry
The Fair Credit Reporting Act is well known for establishing the National Do Not Call Registry thus making dinnertime so much more peaceful. If you haven't already done so, register your telephone number with them at www.donotcall.gov so that telemarketers are not allowed to call you at home.
Recently, there have been many emails circulating on the internet about the pending release of cell phone numbers to telemarketers. The Federal Trade Commission issued a press release on January 19th stating that this was not true. In fact, FCC regulations prohibit telemarketers from using automated dialers to call cell phone numbers. Automated dialers are standard in the industry, so most telemarketers are barred from calling your cell phone without your consent. Everyone breathe a sigh of relief….
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