Happy New Year!
On January 1, 2013 Congress passed The American Tax Relief Act of 2012 preventing us from going over the fiscal cliff. Yes, your taxes are going up; however the increases could have been greater.
For many taxpayers, the increased withholding from the payroll tax expiration will be significant and many will view that as a legitimate tax increase. Without the deal, taxes would have jumped an average of $3,500 per household. Middle income families would have seen an average increase of $2,000 according to the Tax Policy Center.
In summary here are some of the ways your tax bill may change in 2013:
Payroll taxes: The most immediate impact will be the expiration of the 2% Social Security tax cut. In 2009 you were paying 6.2% for the Social Security tax before Congress and the White House cut the tax 2% to 4.2% for 2010 and 2011. This cut has expired and you are back to paying 6.2% as you were in 2009.
Income Taxes: Yes, taxes are going up a bit. All but the wealthiest households avoided the fiscal bullet- the expiration of the Bush-era tax cut. Predictors feared if those cuts reversed all at once it would take away billions of dollars of consumer spending and send the US economy into a recession.
The new law maintains tax rates with the exception of the top tax bracket. The top tax bracket rate has increased from 35% to 39.6%. (Couples with income greater than $450,000 and individuals with income greater than $400,000 will pay taxes at the higher rate on the amount over the threshold.)
Capital Gains, Dividends: Money earned from capital gains and dividends will remain at the Bush-era tax cut (0% – 15%) unless your total income is greater than the top bracket mentioned above. Taxpayers in the top tax bracket pay 20%. Taxpayers in the top bracket will be subject to a 3.8% Medicare surcharge tax on investment and unearned income.
Alternative Minimum Tax: In recent years many taxpayers have avoided the Alternative Minimum Tax because Congress applied a “patch” to the problem. However, this year the problem was permanently fixed by the new law taking inflation into account.
Estate Taxes: The fiscal cliff was set to take a chunk out of money passed from one generation to the next. In 2012 estates of up to $5,120,000 were exempt from federal tax, and any amount over the threshold was taxed at 35%. The fiscal cliff would have cut the threshold to $1,000,000 and raised the top rate to 55%. The new law preserved the $5,000,000 tax free threshold and raised the rate to 40%
I would be happy to clarify any questions you may still have about the changes that have taken place. Please feel free to contact my office at 215-258-1216 to set up a tax appointment.