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Tax Pain Is Only Starting for the Wealthy

BOSTON (TheStreet) -- The tax deadline is three days away, but for the 2.48 million wealthy American families, the pain of higher taxes and increased scrutiny by the government is only starting.

President Barack Obama's proposed budget lets many of the tax cuts enacted by the Bush administration expire, a move benefitting the middle class at the expense of the richest Americans. Tax increases, including those included as part of health-care reform, will hurt those earning more than $250,000 a year, defined as "wealthy" by the IRS.

Taxes

High-income earners can protect themselves. Here are three major tax changes, with a longer review and action plan following.

1. Barring Congressional intervention, 2011 income-tax rates for top earners will increase to 39.6% from 35%. Capital-gains tax rates jump from 15% to 20% in 2011 and 23.8% by 2013, and there are new tax burdens placed on investment income. Singles earning more than $200,000 and households making $250,000 will pay 0.9% more on wages and self-employment income. Because the new taxes aren't indexed to inflation, those currently earning less may still find themselves paying the increased rates.

2. For the first time since 1999, the rich are at a greater risk of being audited than those in lower- and middle-income brackets, and enforcement is being ramped up even more.

3. Tax-related strategies for preserving wealth will require a fresh approach. Once-routine decisions such as which stocks to buy and when to sell, and how to get paid at work will need to be reassessed in light of new government policies. Dividend-paying stocks may suffer, and oft-maligned municipal bonds may gain renewed interest.

Dividend damage

In its effort to get more money from the rich, the government is targeting investments as much as basic compensation.

In an IRS survey of the top-earning taxpayers in 2007 (a list of 400 individuals earning at least $139 million), the group paid $23 billion in federal income taxes. Slightly more than 81% of their reported income was derived from capital gains taxed at a rate of 15%. A mere 6.5% came in the form of salaries and wages that were taxed at a higher rate of 35%. Many executives chose to accept stock options as a large portion of their compensation to take full advantage of tax incentives.

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