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:
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.
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.
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.
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.
The new law preserved the $5 million tax-free threshold and raised the top tax rate to 40 percent.
These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.