Presidential candidate Mitt Romney has been in the news a lot lately concerning the low tax rate he pays for his millions each year. Romney would have landed in the 35% tax bracket had all of his income been wages and salaries. However, since his earnings (like most wealthy individuals earnings) are from investment income and capital gains, he only paid 15% on an annual income of 21 million.
15% is the current tax rate on capital gains which is result of the tax cuts enacted in 2001 and 2003. These rates are scheduled to expire on January 1, 2013, which would lead the top rate on capital gains to rise back 20%. In addition, there will be two more provisions that will increase this rate further. First, is a provision known as Pease. This will increase effective tax rates on high-income taxpayers by reducing the value of their itemized deductions, adding another 1.2% to the effective capital gains tax rate. The second provision is the result of the health reform legislation enacted in 2010 which will impose a new tax on the net investment income of high-income tax payers, including capital gains. This will add another 3.8% to the tax rate bringing the rate from 15% to 25%.
However, the rate could possibly remain at 15% if the tax cuts are extended for high-income payers and if the health reform tax is repealed. This decision will rely heavily on the results of the upcoming presidential elections, as President Obama is against these steps, while the GOP candidates favor them.