Still More Tax Wrinkles

From the comments of my post on deduction phaseouts:

Here's another example:

I have earned about $110,000 so far this year. If you earn more than $115,000 this year, then next year you're considered a 'highly compensated employee' and your participation in the company 401(k) is limited, in my case to 3% of salary. This is based on how much the non-HCEs contribute, and apparently my coworkers are all very irresponsible. (Actually, I work for a company that mostly employs temp workers, very few long-term employees.)

I just learned this a week ago. I'm an hourly employee, and my pay year ends on December 9th. So, I'm working sparse hours for the next few weeks to stay below the $115k line. It's a bright line, no phase-out or anything like that. If I cross the line, my maximum 401(k) contribution next year will be around $3600 instead of $17,500. Assuming that the ability to shift income via a 401(k) saves 10% of its value in taxes, it'll cost me about $1400 to work that hour, and it would then take a week or so to make it up.

This is a basic problem wtih means testing. But it's not necessarily an argument against means testing so much as it is an argument for very long phaseout periods--and especially, for staggering the phaseouts so that they don't all hit in the same income range. This is why the poor can face marginal tax rates that exceed 100%: hit a certain income range, and your EITC, Medicaid, food stamps, and other forms of assistance all start to phase out at once.

See more of our coverage in your search results.

ADD THE DAILY BEAST ON GOOGLE

Megan McArdle

Got a tip? Send it to The Daily Beast here.