Tax laws originally passed in 2001 and 2003 (known as the “Bush tax cuts”) are going to expire on December 31, 2012. There is a lot of uncertainty right now whether Congress will pass new legislation for 2013. It nothing is done, most of us are going to see higher taxes. We’ll explain the main tax changes currently scheduled to occur.
Income Tax Rate Brackets: The existing 10% bracket will go away, and the lowest “new” bracket will be 15%. The existing 25% bracket will be changed to 28%; the existing 28% bracket will be changed to 31%; the existing 33% bracket will be changed to 36%; and the existing 35% bracket will be replaced with 39.6%.
Marriage Penalty: Bush tax cuts gave relief to married couples who often paid more taxes than when they were single. Right now the income limits for lower tax brackets are twice as big for married joint filing couples than single filers (in 2012 the 15% tax bracket applies to taxable income up to $35,350 single filers vs. up to $70,700 for married couples – twice the amount). Starting in 2013, the dollar amount will decrease to 167% of the amount for unmarried taxpayers in the same bracket. In addition, the standard deduction for married couples filing jointly will be less than twice the amount for singles. These changes will have the effect of putting more middle-income joint filers in the 28% bracket and increasing the marriage penalty for many taxpayers.
Capital Gains and Dividends Taxes: Taxes on long-term gains and dividends will go up for everyone. Under current law, people in the 10% and 15% tax brackets pay NO (0%) tax on long-term gains and dividend income. Starting next year, people in the lowest two brackets will pay 10% on long-term gains (or 8% on gains from assets acquired after Dec. 31, 2000, and held for over five years) and 15% and 28% on dividends. The maximum rate on long-term gains is scheduled to increase from 15% to 20% (or 18% on gains from assets acquired after Dec. 31, 2000, and held for over five years). The maximum rate on dividends will skyrocket from 15% to a whopping 39.6%.
Other Expiring Tax Policies: In addition to expiration of Bush tax cuts, other tax policies are set to expire or take effect in 2013. These include:
- Employee portion of FICA payroll taxes will increase from 4.2% to 6.2%.
- Medical and dental expense itemized deduction threshold is scheduled to increase from 7.5% to 10% of AGI (Adjusted Gross Income). The 7.5% threshold will continue to apply through 2016 for taxpayers age 65 and older.
- Student loan interest deduction will apply only to interest paid during the first 60 months interest payments are required, instead of no time limitation under current law.
- Child Tax Credit will reduced from $1,000 o $500 per eligible child.
- American Opportunity Education Tax Credit expires.
It is anyone’s guess if new legislation will be coming to give tax relief. We will let you know any changes as they take effect, but it will be more important than ever for you to work closely with your tax adviser. Call Gary Kaplan now for help with year-end tax saving strategies and tax planning for next year.
