Fiscal Cliff and Taxes

2013 and Taxes
As many of you have learned this week, the folks in Washington finally came to an agreement on addressing 2013 taxes.  As with any tax law change, the end result is more complicated than what we started with.  I'll try to highlight some of the initial points.  I am sure that we'll have more thoughts as we've had more time to digest it.  In its simplest form, the legislation will:

  • Keep the 10-35% income tax brackets as they have been for individuals that have taxable income under $400,000 and joint filers that have taxable income under $450,000.
  • For those that cross the above income threshold, increase the tax rate to 39.6%.  There will also be an increase in long-term capital gain and dividend tax rates (going from 15% to 20%) for this group of people.
  •  Phase out personal exemptions for individuals that have Adjusted Gross Income (AGI) over $250,000 and couples over $300,000 and limit itemized deductions for the same subset of people.   These reductions will generally result in more taxable income for this subset of people.  This translates to higher taxes as well.
  • Permanently adjust the Alternative Minimum Tax (AMT) thresholds for inflation (read no more need for annual end of year "AMT patch").
  • Extend 50% bonus depreciation for 2013.
  • Extend college tuition and child related tax credits.
  • Keep the estate tax exclusion rate at the current level (just over $5 million).  Raise the estate and gift tax rate from 35% to 40% for anyone that exceeds the exclusion level.

Separate from the most recent legislation, there are 2013 changes that will still kick in as a result of the Affordable Care Act.  Some key provisions from that act are:

  • Individuals with earned income over $200,000 ($250,000 for joint filers) will have a 0.9% Medicare surtax on any earned income exceeding those thresholds.
  • Individuals with AGI above $200,000 ($250,000 for joint filers), will pay a 3.8% Medicare surtax on unearned income (dividends, interest, rents, some capital gains).
  • The AGI threshold for deductible medical expenses increased from 7.5% of AGI to 10% of AGI.

Finally, outside of these two pieces of legislation, the 2% reduction in employee social security contribution expires.  With this 2% increase in Social Security tax, you will notice a reduction in your paycheck starting in 2013 and/or an increase in your self-employment tax.  As a result of this item alone, regardless of how they spin it 2013, taxes will increase for most Americans.

By

Wilmington, NC CPA