Sunday, January 27, 2008

Tax Rebate = Tax Increase for Some

The title is counter intuitive, so let me explain. The tax rebate as proposed is phased out for "high" income, for example a single with an AGI of $75,000. The $600 rebate is phased out over the $12,000 of AGI between $75,000 and $87,000. For someone with an income in this range, this is effectively a marginal tax increase of 5%. With an original marginal tax rate that's probably 5% (assuming deductions near the standard value), the effective tax rate is now 30%.

I am caught in this. If I had known about the tax rebate terms last year, I could have adjusted the amount of tax-deferred savings I converted to a Roth IRA.

I can see some merit to the argument that the tax rebate is really the US government borrowing money from the Chinese so the poor can buy Chinese goods. Either the bill for the tax rebate will have to be paid, or interest will be paid in the mean time. Probably increasing the taxes I'll have to pay on tax-deferred savings withdrawn in retirement. So in the end the extra taxes I effectively paid on part of my Roth conversions may balance out in the end.