With all the talk about rising taxes for 2013, we thought that we would highlight some of the federal tax issues that would be of interest to many of our clients. This is not a comprehensive list, but touches on some of the major items that will affect many people in 2013.
Personal and Investment Income Tax Increases:
Personal income tax rates will rise. The top income tax rate will rise from 35% to 39.6% (this is also the rate at which the majority of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise.
Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:
10% bracket rises to 15%
25% bracket rises to 28%
28% bracket rises to 31%
33% bracket rises to 36%
35% bracket rises to 39.6%
Higher taxes on married couples: The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of taxable income. The child tax credit will also be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level.
Estate Tax: The “Death Tax” is currently 35% with an exemption of $5 million ($10 million for married couples if structured properly). For those dying on or after January 1 2013, there will be a 55 percent top death tax rate and estates over $1 million become subject to estate taxes. A person leaving behind two homes and a retirement account could easily pass along a death tax bill as well.
Higher tax rates on savers and investors: The capital gains tax will rise from 15 percent this year to 20 percent in 2013. The top dividends tax will rise from 15 percent this year to 39.6 percent in 2013. With the additional 3.8% investment surtax, taxpayers will be looking at the possibility of 23.8% tax on capital gains and 43.4% tax on dividends.
New Healthcare taxes:
Some tax increases have already gone into effect (the tanning tax, the medicine cabinet tax, the HSA withdrawal tax, W-2 health insurance reporting, and the “economic substance doctrine”). Several more will go into effect on January 1, 2013. They include:
Medicare Payroll Tax Hike. The Medicare payroll tax is currently 2.9 percent on all wages and self- employment profits. Starting in 2013, wages and profits exceeding $200,000 for single filers ($250,000 in the case of married couples) will face an additional .9% tax, bringing the rate up to 3.8 percent.
Medical Device Tax. This law imposes a new 2.3% excise tax. Exempts items retailing for less than $100.
“Haircut” for Medical Itemized Deductions. Currently, those facing high medical expenses are allowed a deduction for medical expenses to the extent that those expenses exceed 7.5 percent of adjusted gross income (AGI). The new provision imposes a threshold of 10 percent of AGI. Waived for 65+ taxpayers in 2013-2016 only.
The Alternative Minimum Tax and Employer Tax Hikes:
When Americans prepare to file their tax returns in January of 2013, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired. The major items include:
The AMT will ensnare over 31 million families, up from 4 million last year. According to the Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 31 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of high income taxpayers.
Full business expensing will disappear. Starting on 2013 tax returns, all purchases of equipment will have to be “depreciated” (slowly deducted over many years).
Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.