Return of the Payroll Tax

How Different Will Your 2013 Taxes Be?
OK, so your taxes are going up.

For most of us, this will come from the expiration of a two-year payroll tax 'holiday', which knocked two percent off your Social Security payroll tax. The last-minute 'fiscal cliff' deal will raise the average American household's tax bill by $1,250 this year, or about $25 a week. Without a deal, taxes would have jumped by more than $500 billion in 2013 as almost every tax cut enacted since 2001 was set to expire. That would have cost the average household almost $3,500 per year, or about $67 a week.

But there is a lot of tax relief that has been extended.

The deal preserves most of those tax cuts - except for the very top earners. Even then, the final deal raised the definition of 'wealthy' from $250,000 for couples/$200,000 for individuals to $450,000 for couples/$400,000 for individuals.

Here are some of the ways your tax bill may change:

PAYROLL TAXES:

The most obvious change will be a small increase (about two percent) coming out of your first paycheck of the year. If you hit that $113,700 limit before the end of the year, you stop paying the tax.

INCOME TAXES:

The Bush-era tax cuts have expired. Only the wealthiest taxpayers will be affected by this, most of us won't feel that sting. The new top bracket (above $400,000 for individuals/$450,000 for couples) will now pay 39.6 percent on every dollar over that amount, up from the current 35 percent.

CREDITS AND DEDUCTIONS:

1. Mortgage interest deductions will be lost for some upper-income households, which will now be capped for individuals making more than $250,000/couples more than $300,000. There will also be a phase out of the $3,800 personal exemption.

2. Good news for parents! They will get to keep a $1,000 child tax credit. The new law also reversed a cut in the $3,000 credit for child and dependent care that was due to take effect. Parents will continue to get the up-to-$2,500 tax credit for college tuition that was set to be cut.

CAPITAL GAINS, DIVIDENDS:

1. Money from capital gains or dividends on investments will still be taxed at 15 percent - unless your total income is more than $400,000 for individuals/$450,000 for couples. Also, those in the top bracket will now pay 20 percent - up from 15 percent.

2. Dividends and gains on investments held in a qualified account like a 401(k) will still be deferred until you withdraw the money when you retire.

ALTERNATIVE MINIMUM TAX:

Originally designed to close tax loopholes for 'wealthy' families, the law's architects forgot to take inflation into account, pushing more and more middle-income households into its path every year.

DOCTOR FEES:

The new law restores Medicare fees paid to doctors - which would have surgically removed 27 percent of your doctor's Medicare income this year - but only for 2013. So you doctor still faces the prospect of a 27 percent cut in 2014.

UNEMPLOYMENT BENEFITS:

1. Previously, Congress added several 'tiers' of extended unemployment insurance for jobless workers. The new law keeps them in place - but only for one year.

2. Low-income families also dodged cuts in the earned income tax credit that were set to take effect in 2013.

ESTATE TAXES:

The new law preserved the $5 million tax-free threshold and raised the top tax rate to 40 percent.