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Perry Rod




01/02/13 at 5:41 AM CST



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New Top Income Tax Rates of 43.4% and 50.9%

2013 brings on a new top tax rate for those whose income is above $400,000.  Ordinary income above that rate is taxed at 39.6%.  However, so-called "unearned income", consisting primarily of short-term capital gains, will include an extra 3.8% tax from The Patient Protection and Affordable Care Act, otherwise known as Obamacare.  The 3.8% tax applies to "unearned income" over $200,000.  This primarily impacts high risk traders who provide liquidity to the market, leaving them with 56.6% of short term gains over the $400,000 threshold.  In other words, short term trading now carries risk of 100% of losses and only 56.6% of the rewards.

Residents of California will see the highest overall income tax rate in the United States.  California's Proposition 30, which passed with 55% of the California popular vote in November 2012, increased state income tax rates for high income earners.  The highest rate is 13.3% for million plus income earners.  Adjusting for the federal income tax deduction for state taxes, that would mean a top tax rate of 50.9% on total short term capital gain income of over one million dollars.  For California residents, short term trading now carries risk of 100% of losses and only 49.1% of the rewards.

Speculative short term positions are defined by the Internal Revenue Service as those that are held under one year.  These new taxes may likely reduce investor appetite for investing in smaller and higher risk assets and may especially impact overall liquidity going into 2013.  This may cause alarm for investors in NYSE Euronext and NASDAQ OMX Group, who may see a decline in liquid trading of smaller capitalization stocks and thus less interest in initial public offerings from smaller companies.

Bottom line: the real top tax rates of 43.4% and 50.9% are higher than the 39.6% number that is often being used to describe the new top tax rate.

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