The new tax picture in 2013
What a difference a week makes. After months of “will they or won’t they?” — they did. Both houses of Congress passed a tax deal this week and they did so overwhelmingly and in a (mostly) nonpartisan fashion.
The Senate vote was 89-8 in favor and the House vote was 257-167 in favor. The new tax deal varies quite a bit from what most taxpayers expected under the old law. Here’s what the new tax picture looks like for families in 2013.
Income tax rates
Income tax rates stay put for most taxpayers. The federal income tax rates for 2013 will be the same as last year for most taxpayers: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. However, taxpayers at the top, defined as individuals with incomes above $400,000 and married couples filing jointly with incomes above $450,000, will see a bump to 39.6 percent.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is now indexed to inflation — permanently. That’s a huge change since, for the last forty years, Congress has scrambled to “patch” the exemption to keep pace with inflation and other increases. Without the fix, nearly half of households with incomes between $75,000 to $100,000 — an estimated 30 million families — would have been subject to the AMT, meaning higher taxes.
Capital gains tax
Capital gains tax and dividend rates stay low. Most taxpayers will pay capital gains at a 15 percent rate with one exception: Taxpayers at the top will see a boost to 20 percent. As with income tax rates, “taxpayers at the top” means $400,000 for individual taxpayers and $450,000 for married couples filing jointly.
Taxpayers at the top are still subject to the 3.8 percent Medicare tax. That tax was crafted as part of the new health care act, which was not modified as part of the tax deal. That means that unearned income like dividends and interest could be taxed at rates of up to 43.4 percent (39.6 percent top marginal rate + 3.8 percent Medicare tax). Remember that while children subject to the kiddie tax are taxed at their parents’ rates for purposes of the Medicare tax, the normal rules for children’s income still apply, which means that children are not subject to the tax just because their parents might be.
Another tax which was a part of the new health care act, Medicare surtaxes for high income taxpayers, also remained unchanged. Generally, employees pay into Social Security at a rate of 6.2 percent of income up to the cap ($113,700 for 2013) and into Medicare at a rate of 2.35 percent for all wages (there’s no cap). Under the new law, those taxpayers with wages over the income thresholds (individuals with income over $200,000 and married couples filing jointly with income over $250,000) are subject to an additional .9 percent Medicare tax.
Payroll tax cut
The payroll tax cut has expired. The payroll tax cut, which reduced payroll tax contributions on the employee side by 2 percent, expired on December 31, 2012, and was not renewed. That means that all families with at least one working parent will now see at least a 2 percent decrease in their take home pay.
Exemptions and deductions
Exemptions and deductions will be limited for high-income families. Generally, as income increases, the ability to claim personal exemptions for dependents and itemized deductions is phased out. Phase-out for those tax breaks will begin at the adjusted gross income (AGI) of $250,000 for individual filers and $300,000 for married couples filing jointly.