Already this year, two federal income tax increases were included in 2010 health care reform legislation, both of which may have the heaviest impact on affluent retirees.

To see what may be coming, let's imagine a hypothetical couple, "The Crowleys," currently age 68 with adjusted gross income of $300,000. We'll assume they itemize deductions, take two person exemptions, and live on a combination of retirement plan withdrawals, annuity withdrawals, capital gains, interest on savings and Social Security.

Currently, they pay federal income tax in the 33% marginal bracket. Assuming a 5% state income tax impact, they face a combined marginal rate of 38%. In addition, 85% of their Social Security benefits are taxable, and their Medicare Part B premiums total $5,304 per year due to their high income (about $3,000 per year more than for retirees with average incomes). Let's estimate that the Part B premium impact pushes their marginal combined bracket up by 2%, to 40% total.

Now, let's see how tax changes could increase their marginal rate to more than 50%.

• The Obama Administration wants to let the Bush tax cuts expire on 12/31/11 for high-income taxpayers with incomes over $250,000 (joint) or $200,000 (single). If the President gets his way, this would cause the Crowleys' tax bracket to rise from 33% to 36%. The highest federal tax bracket would increase from 35% to 39.6%.

• For high-income Americans, the Administration wants to let the federal tax rates on long-term capital gains and Qualified Dividends revert to pre-tax-cut levels. This would increase the Crowleys' rate on long-term gains from 15% to 20%. Federal tax on their dividends would increase from 15% to 36%.

• Buried in the fine print of the tax debate is the scheduled expiration of relief from a 3% reduction of itemized deductions for taxpayers with Adjusted Gross Income (AGI) in excess of a threshold of about $166,800 ($83,400 if married filing separately). Partial relief was enacted for 2006-09 and full relief was available in 2010. If the provision is fully reinstated in 2011, it will increase the Crowley's marginal rate by about 1%.

• The Obama Administration has proposed limiting the tax value of itemized deductions to 28% for taxpayers in the 36% or 39.6% federal tax brackets, effective in 2011. (This proposal would require new legislation.) By reducing the value of itemized deductions from 36 cents on the dollar to 28 cents on the dollar, it could add about 2% to the Crowley's marginal tax rate, if enacted.

• If the Bush tax cuts are allowed to expire on schedule, a full personal exemption phase-out will be reinstated. Each personal exemption will be reduced by 2% for every $2,500 that AGI exceeds a threshold, which begins at AGI of about $250,200 (joint) or $166,800 (single). For each exemption claimed, expiration would about 1% to the taxpayer's effective marginal rate. We'll figure 2% marginal impact for the two exemptions the Crowleys claim.

• The Health Care and Education Reconciliation Act of 2010 included a new 3.8% Unearned Income Medicare Contributions Tax (UIMCT), effective in 2013. The tax will be imposed on the lesser of: 1) net investment income; or 2) modified AGI (plus any excluded foreign income) over a threshold amount. The threshold amounts are $250,000 for joint filers and $200,000 for single filers. "Net investment income" includes interest, dividends, royalties, rents and capital gains. It does not include distributions from qualified plans or IRAs. According to several legal sources, non-qualified annuity income payments (or withdrawals) and taxable life insurance withdrawals will be subject to UIMCT.

• Another part of health care reform legislation, The Patient Protection and Affordable Care Act of 2010, made Medicare Part D prescription drug coverage more valuable to seniors. But to pay for an expanded drug benefit, the act imposes the same "income-relating" to Part D premiums that already exists for Part B. Effective in 2011, premiums for Part D will increase in tiers (the same income tiers used for Part B) for taxpayers with Modified Adjusted Gross Incomes above $85,000 for individuals or $170,000 for couples. Unlike Part B premiums (which are set by law), Part D premiums are set by the competitive market and individual insurance companies. An average premium is about $35-40 per person per month, so this provision will add about 1% marginal tax impact for high-income seniors like the Crowleys. (Like Part B, the higher Part D premium will be determined based on a two-year look-back: 2011 premiums will be based on reported MAGI in 2009.)

• As state governments continue to run deficits, pressures are growing for higher tax rates on upper-income taxpayers. Several states already have created new top tax brackets, permanently or temporarily. For example:

  • New York has new top rates of 7.85% and 8.97% through 2011.

  • Oregon, has new top rates of 9.9% and 10.8% through 2011.

  • Connecticut has created a new 6.5% permanent top tax rate.

We'll project that the Crowley's state income tax rate will increase by 1% at some point in the future.

A 54% Marginal Tax Rate - For Seniors Only

Let's begin with the Crowley's current federal/state marginal tax rate of 40% and see where they soon may be going:

The Crowley's total marginal tax rate could rise to nearly 54% -- in addition to increased taxes on their long-term capital gains and investment dividends, if the Bush tax cuts expire for high-income taxpayers.

Beyond the impact of a potential 54% marginal tax rate, several troubling trends are apparent for high-income seniors:

• Retirement taxes - A growing number of taxes apply only to retirees. They includes the tax on Social Security benefits and higher premiums for Medicare Part B and Part D. Waiting in the wings is the report of the National Commission on Fiscal Responsibility and Reform, which is due by December 1 as a first step toward addressing long-term funding shortfalls in Social Security. You can follow the Commission progress at its Website: http://www.fiscalcommission.gov

  Although this bipartisan commission isn't expected to reach significant conclusions approved by the required 14 of its 18 members, it could open a door to the future income-relating of Social Security benefits, which would be another type of retire-focused tax impact.