INCOME TAX SALE
Income taxes paid by Americans last year were at their lowest level since Harry Truman was president, according to the Bureau of Economic Analysis. Federal, state and local taxes, including income and other taxes, but excluding real estate and sales taxes, consumed 9.2% of all personal income in 2009, the lowest rate since 1950. This rate is far below the historic level average of 12% for the last half century.
Individual tax rates vary widely based on how much a taxpayer
earns, where the person lives and other factors. On average,
though, the combined tax rate paid by all Americans, rich, poor
or somewhere in-between, has fallen 26% since the recession
began in 2007. Taxes paid have fallen at a much faster clip
than income during this recession. While personal income fell
2% last year, the amount of taxes paid dropped by 23% (social
security taxes are excluded from the tax calculation.)
In an interesting twist, a Gallup Poll last month found that 48%
of those surveyed thought taxes were "too high" while 45%
thought they were "about right." In reality, they were at a 50-
When John F. Kennedy took office the top income tax rate was
91%. He lowered it to 71%. In 1981, President Ronald Reagan
reduced the top rate to 28%. Today, it is 35%. Unfortunately,
the 35% rate is due to expire on December 31, 2010 and will
go back to 39.6% on January 1, 2011.
The expected rise in federal income tax rates creates an
interesting dilemma for retirement account holders converting
to Roth IRAs in 2010. Should they treat the taxable portion of
their conversion as 2010 income, knowing the rate at which
they will pay income tax? Or, should they roll the dice and
split the amount evenly in 2011 and 2012, not knowing exactly
where rates will be or how much tax they will pay on their conversion?
These individuals must ponder where they think their
income levels will be in 2011 and 2012, versus 2010, and make
an educated guess about where income tax rates are headed and
what affect all of that will have on them.