Today's financial literacy lesson concerns structured attorney fees, specifically where one of my industry colleagues flubs his lines when describing why to do them.
"For married couples who file their taxes jointly under the present law, the highest marginal tax bracket surpasses 30 percent. A lawyer, who would have under normal circumstances earned a substantial income in a year but chooses instead to have it paid over several years, is able to avoid paying taxes in THIS highest bracket as a result. If not, then he at least manages to delay the payment of taxes for several years. If you combine these evident tax savings with the benefits he will earn on the delayed amount, it becomes clear why such fee plans are advantageous". (underlines, bold and capitalization added for emphasis)
Despite his being a neophyte to the settlement planning scene, the colleague in question is a well established businessman. This makes what he states all the more surprising. He currently floods the internet with new content as well as some ancient stuff that has obviously been recycled from his general agent and some, like the above, where the facts just need to be checked BEFORE posting.
1. Definiton of "Marginal Tax Bracket"
The level of income tax of a given individual, as indicated by the amount of taxes he/she pays on his/her final dollar of taxable income Source: Investor Words
Amount of tax imposed on an additional dollar of income Source: New York State Society of CPAs
2. Fails to acknowledge that the Internal Revenue Code distinguishes between Married Couples Filing Seperately and Married Couples Filing Jointly. Let's assume that we are referring to the latter.
3. Next, let's have a look at just the FEDERAL income tax tables shall we?
Schedule Y-1 — Married Filing Jointly or Qualifying Widow(er)
Use this schedule to figure out your tax if you are filing as married filing jointly.
- 10% on the income between $0 and $16,700
- 15% on the income between $16,700 and $67,900; plus $1,670.00
- 25% on the income between $67,900 and $137,050; plus $9,350.00
- 28% on the income between $137,050 and $208,850; plus $26,637.50
- 33% on the income between $208,850 and $372,950; plus $46,741.50
- 35% on the income over $372,950; plus $100,894.50
Source: Internal Revenue Service www.irs.gov
While the words "surpasses 30%" is technically correct as stated above, the next sentence (from the proof reading deficient colleague) inaccurately states that it (30%) is the highest marginal tax bracket. As one can clearly see the highest marginal FEDERAL income tax rate is 35% (and in all likelihood headed north in due course to help pay for the deficit).
Then there are those darn state tax rates and possibly local tax rates!
Link to State Individual Marginal Tax Rates 2009 (and if you really want to know, the trend from 2000-2009)link to the 2009
Link to list of Local Wage, Income and Occupational Privilege taxes 2008
The individual in question was onto the right thing, but didn't think it through carefully enough.
More for plaintiff attorneys who are interested in Structured Attorney Fees.