Wealthy California Residents Upset About Higher Tax Rates

Residents Upset About Higher Tax Rates

Many business owners are seriously considering leaving “The Golden State” for good due to excessively high taxes.

From small business owners in the bustling town of San Diego to the top vintners in the beautiful Napa Valley, many high-income Californians are preparing to pack their bags for good.

PGA Tour commissioner Tim Finchem and Phil Mic...
PGA Tour commissioner Tim Finchem and Phil Mickelson at the awards ceremony for The Players Championship in 2007, which Mickelson had just won. (Photo credit: Wikipedia)

High-ranking golfer Phil Mickelson is speaking out about his feelings on this issue. He feels that he is being forced to make some tough decisions and has admitted that he has considered relocating to a state that doesn’t make top-earning residents pay such high taxes. Although Mickelson was vocal about his stance on high state taxes, he later regretted speaking so openly.

Peter Farrell, a medical-device manufacturer in San Diego, has approximately 600 workers and has considered moving his offices to a different state in order to save on income tax. Texas has become an attractive option for many business owners, primarily because it is a no-income-tax state. Income tax in California is currently 13.3%, which is too high, according to many residents.

Many believe that Proposition 30 is the cause of these tax laws that are seemingly unfair to those with higher incomes. This tax-increase proposal was voted into law by California’s residents, resulting in a huge net spend for the state. Households earning $250,000 or more each year already pay up to 62% in state taxes, and a further increase in taxes is causing residents to bail. In fact, many residents have already left the state, according to Fox News. These residents chose to remain anonymous due to their fear of being audited by the IRS, but all of them expressed their frustrations with California’s tax laws.

Residents are also trying to figure out how to legally relocate without completely cutting ties with California State, according to tax analysts. These experts believe that many residents will figure out how to do this and act on it by the year 2014.

Planning For Tax Changes

Potential changes in the tax laws proposed by President Obama mean that right now is a great time to start budgeting for your 2012 taxes.  One major change will be a change for those in the highest tax bracket from fifteen to nearly forty percent as part of sweeping increases in taxes collected from high-income individuals in the next ten years.

The plan calls for high taxes on earnings from dividends, a departure from earlier policies that protected earnings on this type of income.  The White House feels that the system for taxing investment earnings is one of the most unbalanced part of the current tax code, and this measure is one step to help fix the issue.

For those planning for their 2012 taxes, this means that individuals and couples need to begin looking at their investment income from previous tax years and determining whether they will be subject to these increased tax rates.  Setting aside additional money from a monthly or yearly budget to cover this potential tax increase is the best way to offset the effect of higher rates without suffering tax-time shock.

The overall goal of President Obama’s tax changes is to reduce the federal budget deficit that has plagued the US during this economic downturn.  While this change is not expected to eliminate the deficit entirely, it is part of a long term plan to use tax money from wealthy Americans to reduce the tax burden on lower income workers while still raising needed revenue.

How Does The IRS Choose Who To Audit?

Quick Facts About the IRS Audit

Getting a letter from the Internal Revenue Service stating you’ve been selected for audit is a taxpayer’s worst nightmare and can create a lot of anxiety.

Sometimes these notices are simple, such as you forgot to sign a document or you made a math error. The more ominous possibilities, however, will question your income, deduction claims, and more.

The IRS definition of an audit states that is simple a review of a taxpayer’s return used to verify the tax amount paid and reported is correct. If you happen to be selected for an audit, the IRS website has videos and guides to help you through the process.

In 2011 alone, nearly 1.6 million people were audited. This is slightly more than 1% of the total returns filed. Three foruths of these were completed by correspondence alone, and only one quarter required a field agent examination (in person.)

On income levels, only 1% of those with an income level of less than $200,000 were audited, while 12.5% of those who made $1 million or more were audited.

A spokesperson for the IRS, Terry Lemons, has said that the majority of taxpayers will never have to worry about an audit because their tax returns are filled out accurately.

While there is no magic equation to how the IRS selects who to audit, TurboTax can help you avoid many of the “red flags,” such as significant differences in income or deductions from those within the same demographic, in your 2012 taxes.