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  • Nov 30, 2012
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Paying Taxes Doesn’t Mean You’re Making Money Anymore.

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Remember the adage, “if you’re not paying taxes, you aren’t making money?” These days, it serves as little relief to those facing the ever-approaching Fiscal Cliff. This morning, I saw a post on facebook declaring that, “no small business has to worry about being part of the 1%.” Really? Not under Obama’s definition of ‘rich.’

So what does it mean for you, Mr. and Mrs. Taxpayer? Well, here’s the simple, short answer:

1. Inheritance tax is slated to go from a $5,000,000 exemption to a $1,000,000 exemption, which essentially means that whatever wealth your dead parents accumulated for you and your children’s futures gets double-taxed, assuming they were paying their taxes while they were alive. Any inheritance over the cap used to be taxed at 35%, but if no action is taken, the rate will leap to 55%! That means here in Hawaii, where real estate is, to say the least, expensive, the home your parents paid off and bequeathed to you, which has appreciated in the forty years since they purchased it, will have to be sold if it’s worth more than $1M. You’ll get to take that money and give $550,000 of it to Uncle Sam. “Drat,” you’ll think to yourself, “if only they’d died in 2012 when the rate was $5M, and only the rich had to give their parents’ wealth to the government.

2. If you make more than $200,000 as a single person or $250,000 as a married couple in real estate passive income (income, say, from your apartment buildings–which, as we all know, lives a far distance from ‘passive’ in the investment world) you will be subject to an additional 3.8% tax on top of whatever other taxes you’re paying. This will begin January 1, 2013. Why the cap isn’t twice as much for married people, like when you sell your home and are able to keep the gain? It’s a mystery only Barak’s administration understands.

3. If you sell your investment property to avoid these additional taxes on your income and do not exchange into another equal or better property (which would defeat the purpose of trying to escape the tax man anyway), the 15% federal capital gains rate we have loved for so long will have vanished. Rather, you’ll be subject to somewhere between 20% or a percentage based on your ordinary income (up to 40%). Tack on the 7% state capital gains taxes for Hawaii, and you could potentially end up losing almost 50% of your gain when you sell. That, my friends, sucks.

I’m no tax expert, but the Fiscal Cliff doesn’t seem to only affect the 1%, especially in our beautiful state. Rather, it will affect me and maybe you, too. It will also very definitely affect small businesses and my clients, many of whom spend their days fixing broken toilets and painting chipped walls in assets their parents left to them with the hope they would provide a better future for a very long time. They will face higher taxes than they have in decades with the same amount of work, vacancy, and headaches that being a landlord requires. Oh, they’ll be paying taxes alright, but making less money.