February 04, 2013

With the passage of the American Taxpayer Relief Act of 2012 the proverbial "fiscal cliff" was officially moved down the road.

While annual deficits still loom large and a higher "cliff" will need to be navigated in the future, at least there is now some clarity for each of us in 2013.

Here are some of the major provisions:

  • You're now living with less take-home pay. Your social security tax rate went back to 6.2% in 2013. An extension of the lower 4.2% rate in 2011 and 2012 was not added to the recently passed legislation. So if you have not done so, please review your household budget to adjust for the lower take-home pay.
  • Income tax rates now have certainty. The tax rates will remain unchanged for 2013 if your taxable income is below $400,000 unmarried, $425,000 head of household and $450,000 married filing joint. Taxable income above these levels will have their income taxed at 39.6% versus 35% (a 13.1% tax increase). Approximately ½ of the impacted tax returns will be small businesses. If this could impact you, now is the time to plan accordingly.
  • Maximum Dividend and Long-term Capital Gain tax rate goes to 20%. The tax rates on ordinary dividends and long-term capital gains remain unchanged for 2013 (0% if you are in the 10 or 15% income tax bracket; 15% for everyone else) if your income is below $400,000 single, $450,000 married filing joint. For those with incomes above these amounts, the rate goes to 20% (a 33.3% increase). Tax planning to match investment losses against gains will become more important in 2013.
  • Itemizing Medical Deductions is now harder to do. Unless you are 65 or older, you may not itemize your out-of-pocket medical expenses until they exceed 10% of your adjusted gross income. This is an increase from 7.5% in 2012. Consider loading appropriate medical, dental and eye care expenses into one year if it will help you pass the threshold.
  • Phase-outs are back! Your personal exemptions and your itemized deductions can once again be phased out in 2013. This tax increase will impact you if your income exceeds $250,000 single or $300,000 married filing joint. You could lose all your personal exemptions and up to 80% of your itemized deductions. Please recall a form of these phase-outs was common practice in 2009.
  • More upper income tax increases. In addition to the tax increases for upper-income taxpayers on income tax rates (35% to 39.6%), capital gains/dividend tax rates (15% to 20%), itemized deduction phase-out, and personal exemption phase-out there are new Medicare surtaxes in 2013. If your income is $200,000 single or $250,000 married, any additional income will be subject to an additional .9% Medicare surtax. If your income exceeds these levels you could be subject to a 3.8% Medicare surtax on your investment earnings.

While a major piece of tax legislation was passed on the first day of January 2013, don't expect it will be the last. Congress and the President will be continuing the debate over our massive annual spending deficit and the national debt. Because of this, more tax changes could occur in the near future.

Topic: Advice