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Election Season Economics: Comparing the Presidential Candidates' Tax Plans

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How will Romney or Obama's proposed tax plans affect you?

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President Obama's Tax Plan

Ok, now let's take a look at President Obama's tax plan. He wants to keep the federal income tax rate for the four lowest tax brackets the same, but raise taxes on the fifth and sixth brackets by 3% and 4.6%, respectively.

So that means if you are single and earn between $178,650 and $388,350 per year or if you are married and filing jointly and earn between $217,450 and $388,350 per year, your tax rate next year will be 36%.

If you earn more than $388,350, married or single, then your effective tax rate goes to 39.6%.

Now, those numbers will be adjusted up for inflation next year, but they shouldn't change dramatically.

President Obama's plan would also leave the Alternative Minimum Tax (or AMT) in place as well as the estate (death) tax.

The AMT is a federal tax levied on a person's adjusted gross income, which is the income you are taxed on after making all your deductions.

The AMT is designed to make sure that high-income taxpayers pay a minimum amount of tax after accounting for deductions.

A little background here: Usually, taxpayers can deduct a large percentage of their income, pushing them down into a lower tax bracket. Some people can deduct so much that they don't have to pay anything at all.

That is partly why the average tax rate in 2009 was so low at 17% and why it has been said that 47% of Americans don't pay any federal income tax at all.

The AMT forces taxpayers into paying a minimum amount of tax after adjusting for their deductions. That way, millionaires can't deduct their tax rate down to zero.

Some deductions don't apply, though, like those for state income taxes and those for dependents.

Since the income level in the tax bracket doesn't adjust annually to inflation, the AMT, which was established in 1969 to only affect a select group of the very wealthy, now affects millions of Americans.

It is complicated to figure out if you qualify, but you need to start worrying about the AMT if you make more than $112,000 per year or $150,000 per year if married and filing jointly.

If you are hit with the AMT, you will end up paying either the AMT rate, which ranges from 26% to 28%, or the normal income tax rate, but not both.

President Obama has floated the idea of a new AMT, known as the Buffett Rule, after billionaire investor Warren Buffett. While not officially a part of his 2013 budget, the Buffett Rule is still on the table.

The Buffett Rule would replace the current AMT and would only hit taxpayers who earn more than $1 million.

The rates would be 32% for those making between $1 million and $10 million; 33% for those making between $10 million and $100 million; and then back down to 32% for those making over $100 million.

The estate tax, thankfully, is a much simpler concept. It is basically a federal tax (currently 35%) levied on the value of a person's estate (starting at $5.12 million) when they die.

President Obama wants to raise the tax rate to 45% and lower the value at when the tax kicks in to $3.5 million.

President Obama's plan also calls for extending the payroll tax cut, which currently reduces the amount of Social Security tax people pay.
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