At the last minute Congress passed a new law that will affect most of us. Below I outline a few of the changes.
1) Your payroll taxes are going back up to where they were before the last 2 years. Total payroll taxes = 15.3%, with 7.65% paid by the employer and 7.65% paid by the employee. The 7.65% is broken down into social security portion of 6.2% and Medicare of 1.45%. It is the 6.2% portion for the employee that was lowered to 4.2% for 2 years, and that is going back up to 6.2% for 2013. The 6.2% maxes out at $113,700 for 2013, so for a taxpayer making more than $113,700 that equates to an additional tax of $2,274 for 2013, and if you make $50,000 that means you will pay $1,000 more.
2) Who is paying higher income taxes? Well, if you are single and make more than $400,000 or married and make more than $450,000, than your top tax rate is going up from 35% to 39.6%. President Obama campaigned for 2 years on a plan to raise taxes on individuals making more than $200,000 and married couples more than $250,000. So we knew something had to give here. All other tax rates have no change.
3) How about taxes on investment income, capital gains and dividends? If you are in the $400,000 or $450,000 income bracket your rate on this unearned income will rise from 15% to 20%. All others will stay at 15%, except those in the lowest 2 tax brackets who will pay 0%! High earners should also be aware of the 3.8% health care tax on unearned income that starts in 2013 as part of President Obama’s Affordable Care Act.
4) Very important tax breaks for families will be extended for 5 years. This includes the Child tax credit, the earned income tax credit that was originally set up by President Reagan in the 1980s, and the American Opportunity Tax Credit of up to $2,500 a year for 4 years for low income families.
5) If you have ever been subject to the AMT tax, you know how painful that can be. Well, many middle income taxpayers will be protected going forward from this tax as it will now be adjusted for inflation. It was never adjusted previously, and every year seemed to hit wage earners who made less money. We should see some protection here.
There are many other updates and of course the rules keep changing all the time so it is always best to seek competent advice when determining your specific situation.
Listen as Win Damon and I review these changes on WNBP Radio 106.1 FM and wnbp.com
With more than 23 years of experience as a credentialed tax professional, Stu Steinberg, CPA, MBA brings a broad depth of knowledge to his work. He has worked with families and small business entrepreneurs for many years helping them plan more effectively. He can be reached at stu@erocktax.com or (781) 247-5569 anytime.